Do you remember a few years back when investing in mortgages managed by solicitors was a common way of getting regular income for many Australians? Mortgage funds, also called a mortgage trust, nowadays have changed structures and are more regulated for consumers' protection, but the basic investment concept is still the same.

As the name suggests, a mortgage fund takes investors' money and uses it to make loans secured by mortgages or buy existing ones. You as an investor then receive the net interest payments on those mortgages, after the Investment Manager deducts fees and expenses in running and operating the Fund. These loans can be secured by mortgages over retail, commercial, construction and development, industrial or residential properties. In return for investing your money, the fund manager promises to pay you a regular income, usually monthly quarterly or half-yearly (called distributions).

Evolution from solicitors' books

The introduction of the Managed Investments Act in 1998 (now Chapter 5C of the Corporations Act 2001,) and the subsequent Financial Services Reform Act 2001 (FSRA) (now Chapter 7 of the Corporations Act 2001) saw greater regulation introduced to the mortgage investment industry. Legal firms which had acted as a conduit between clients with funds to invest and clients with a need to borrow now had to meet additional statutory requirements, such as obtaining an Australian Financial Services License (AFSL), the appointment of Authorised Representatives and additional Product Disclosure Statement requirements. Furthermore, FSRA introduced greater limitations on the ability to provide financial product advice.

Many small solicitor mortgage books were not of significant scale to absorb the costs needed to meet these additional requirements. Accordingly, the new compliance burdens forced many Solicitors to decide between being a mortgage operator or operating a legal practice, with many choosing the latter.

What type of investment can you choose?

Mortgage Funds can be set up in different ways. You can choose:

• Pooled mortgages where all investors share in all the mortgages. You therefore take your share in all the income and spread the risks across all the mortgages that the scheme manages. Low to Medium Risk
• Contributory mortgages where you choose which mortgage(s) you invest in. Your mortgage(s) may pay a different income than other mortgages in the scheme. Your risk depends on the quality of the borrowers to whom you have chosen to lend. Medium Risk

Why invest in mortgages?

Currently thousands of Australians, companies, trusts and self managed superannuation funds have over $25 billion invested in Mortgage Funds. A mortgage fund can provide you with superior investment returns to cash management trusts. Apart from higher returns, mortgage funds give your investment portfolio an extra level of diversification. Given that mortgage funds are not closely correlated with returns from other asset classes, adding a mortgage fund to your investment portfolio can smooth the volatility of your total investment returns.

Rate of return

Investments in private mortgages can consistently earn between 7% and 15%, but remember that investing in a mortgage fund is of course, not entirely without risk, as the value of the underlying investments can fluctuate depending on the quality of the mortgages. Thus, we recommend that you first speak to your financial planner about the level of risk you are comfortable with and individually assess each mortgage fund before you sign anything. However, the rate of return for a mortgage fund compares very favourably with other forms of investments.

Unlike investments in stocks or bonds, mortgage investments are secured by tangible assets that you can 'touch and feel'. Typical mortgages are based on a percentage of the appraised value of the real estate security or the Loan to Value Ratio (LVR). By combining a lower LVR with short loan terms (the length of time of the loan is outstanding) the likelihood of the value of the real estate security dropping below the value of the mortgage is in a normal market considered minimal.

As an example, if you were to invest $100,000 in a mortgage today, with real estate security worth $133,000, in two years time, when the mortgage matures and is repaid the value of the real estate could drop 20% and your initial investment capital should on balance still be protected. Compare that security to a $100,000 investment in a share whose value drops 20% to $80,000 after your purchase it!

Once the borrower receives the mortgage funds, they are required to make regular periodic payments of interest. This provides you as the Investor with regular periodic cash flow.

You choose the real estate mortgage that is right for you...

In conjunction with one of our trusted alliance partners, you and your financial planner can review the details of the borrower and the proposed loan, including investment term, interest rate, and payment terms together with a description of the project or property used as security for the loan before you invest anything. Based on this information, and any additional details required, you make the decision whether you want to invest or not. Minimum investment is $1,000, so you can have all the advantages of being "the bank" without having to fund the entire mortgage.

The types of first and second mortgage investments available can include:

• Residential single and multi purchase and development

• Unit or apartment conversions

• Land acquisition, land servicing and new construction building loans

• Commercial, retail, industrial and other projects.

• There is also the option to invest in a diversified pool of mortgages using the pooled mortgages option

The Pooled Mortgages Option, as the name suggests, pools investors' money to invest in a wide range of first mortgages in Australia, diversified by both sector type and geographic location. The Option currently invests in nearly 400 different mortgages. The initial investment term is for 12 months, and the maximum loan to valuation ratio for mortgages in the Pooled Mortgages Option is 75% (the actual average is 60.0%).

One of the key strengths of the Pooled Mortgages Option, as confirmed over the last 18 months, is the stability of its returns. It has also been recognised as Australian best Mortgage Fund by Money Magazine, by winning the 2010 Best of the Best Award.

Professional Management

In connection with our trusted alliance partner, we will manage all the details of the mortgage loan. We co-ordinate all the legal documentation, monthly mortgage administration and mortgage renewal negotiations. We collect your interest due and pass it on to you, the investor. Fees for this service are paid by the borrower via a management fee which is paid with the borrower's interest.

Our partner is a comprehensive mortgage investment management group, and one of the largest privately held financial services businesses in Australia, with total assets held and under management at 30 June 2008 exceeding $1.5 Billion. They serve over 27,000 customers for both mortgages and investments and have lent over $10 billion dollars to 100,000 customers since inception in 1952.

Advantages to investing in a mortgage fund through Intellichoice

• Higher yielding fixed interest product, offering quality investment portfolio diversification

• Monthly, stable cash distributions or option to automatically reinvest

• Very low capital volatility - an investment directly secured by mortgages over a diversified pool of properties, with security collateral valued at 150%-200% of investment value

• Rated by independent agencies

• No investor redemption freeze - a liquidity structure that has proven it meets our investors' expectations

• Quality asset pool selected and structured from our partner's extensive settlement volumes and designed with superior diversification

• Enhanced collateral protection (income and capital) through a dedicated cash Reserve

• Higher investor rates among its asset peers over all time periods

• Long term, successful fund manager with sound business, long term funding, stable profits and a strong balance sheet

• A regular communications program with our investors, providing timely transparency and confidence that they will be regularly kept informed

If you are interested in finding out more about a mortgage fund or other investments and how a financial planner at Intellichoice can help you grow your wealth in a safe way, call 1300 55 10 45 today. We have a wide range of mortgage fund options available in the major capital cities, including Sydney, Melbourne and Brisbane. Minimum investment needed for a mortgage fund is only $1,000.

Investing is an important part of building a secure financial future. It may seem complex and confusing, but the financial planners at Intellichoice are dedicated in providing you with a clear direction to move towards to maximise your long-term wealth. Investments can essentially be classified into two asset classes - defensive and growth assets. Defensive assets include cash, fixed interest investments and some alternative investments. They are called defensive because there is a low risk of capital loss and a high proportion of their returns come from income, for example interest payments. Below are some examples of cash and fixed interest investments.

Cash

Cash, such as bank accounts and bank bills, are generally only considered appropriate as primary investments if your time frame is short (up to three years), or to accommodate the need for ease of access.

Fixed interest

Many investors believe the fixed interest sector consists solely of investing in bank term deposits. A bank term deposit is where funds are 'locked' in for a fixed period of time and earn a set return. However, fixed interest investments actually come in many forms including:

• Treasury notes – short term debt instruments issued by the government

• Debentures – interest bearing securities commonly issued by finance companies

• Fixed interest trusts – a unit trust that invests in a range of fixed interest securities. For example, mortgage trusts and bonds (government, semi-government and corporate).

Term deposits

• Term deposits are offered through banks, building societies, credit unions and other prudentially regulated institutions

• There are lower risks involved with term deposits because the institutions are specially regulated by APRA

• Generally pays a higher return than cash

• Offers investors a fixed return for a fixed period of time

• Term deposits are an ideal investment tool for investors who want certainty. It is ideal ofr investors who are looking for safety, security and a guaranteed investment return.

• Term deposits are simple, reliable and easy to understand

• Term deposits offer a regular income and provides the investor the option of taking interest on a monthly, quarterly, half yearly or annual basis

• Have guaranteed returns and are less risky than shares and property

Cash management trusts

• Cash management trusts are offered by licensed businesses through a product disclosure statement

• These trusts are not regulated by the APRA

• Risk and return will depend on what the cash management trust invests in

Government bonds

• Offered by governments on advertised terms and conditions

• Payment of interest and of capital at maturity are government guaranteed

• Australian Government bonds are highly secure and returns tend to set a benchmark for the market

Debentures and unsecured notes or unsecured deposit notes

• Offered by companies through a prospectus

• You are not guaranteed a fixed rate of interest or return of your capital

• The business might use your money to finance a wide range of activities, or it may on-lend your money to another business

Mortgage funds

• You invest money in a mortgage fund offered by fund managers through a product disclosure statement

• You might not be able to withdraw from the fund at short notice

• You're not guaranteed a fixed rate of interest or return of your capital

We recommend you speak with a certified financial planner on 1300 55 10 45, who can assist you in determining the appropriate mix of investments for your circumstances, time horizon and financial goals.