This article appeared in the Australian Jewish News on 28 August 2020.
It is proving a difficult year for investors and self-funded retirees. The COVID-19 pandemic has created uncertainty in equity and rental markets, while the Reserve Bank’s cuts to official interest rates have made it even more difficult for investors to generate income. Bowery Capital discuss the value of private mortgages.
In the current environment investors and wealth managers are increasingly turning to private mortgages to generate predictable income without taking on too much risk.
Private mortgages have grown into the space vacated by the major banks in recent years, creating a market for investors to generate handsome returns with bank-like first mortgage security.
Private mortgage providers generally offer investors 7 to 11 per cent returns secured by first-ranking registered mortgages, and higher returns for second mortgages.
Fisher believes mortgage funds will continue to grow, “Twenty years ago private mortgages were mostly run by law firms offering investment opportunity to their preferred clients. Now it’s a highly professional industry servicing a wide range of investors.”
While the current pandemic presents challenges, it has also brought private mortgages to the forefront of investor thinking. Many investors have learnt the hard way that dividends from bank and infrastructure shares are not as certain as they previously may have appeared to be, and rental returns can languish.
In this environment the security of a registered first mortgage has been a major growth driver of private mortgages.
“Our investors choose the borrower they lend to and the property they lend against, this gives them full transparency over the project and the terms of their investment. To diversify they can invest in multiple mortgages at the same time,” said Fisher.
“At Bowery Capital your investments are backed by bricks-and-mortar Australian real estate, allowing for monthly returns largely unaffected by Australian consumer confidence or what happened on Wall Street overnight. For our investors, that security is important.”
While some investors are very familiar with private mortgages, many others are now looking at them for the first time after decades of investing in equities, direct property and term deposits.
“Our job is to find investors the right developers to partner with and the right projects to lend to. Our due diligence process is critical, especially in this market,” said Bowery Capital director Matt Crowe.
Alan Bertacco of Bertacco Ferrier Property Valuers recognises the sector’s role in bringing opportunities to investors, saying, “Many quality sites and investments are finding their way to private mortgage funds. The sector is providing stability and a way forward for developers and investors.”
Professional wealth managers like Andrew Height, principal of Height Capital, are increasingly using private mortgages to enhance investor portfolios.
“It’s become more difficult to derive a stable income in most asset classes, especially bank deposits and equity markets. Private mortgages increase portfolio yields and allow the client to use their remaining portfolio to pursue growth. This strategy creates higher portfolio returns while remaining diversified,” he said.
The investment landscape is constantly changing but private mortgages are clearly positioned to become a larger proportion of investment portfolios into the future.