UNDERSTANDING FIRST MORTGAGE INVESTMENT
First mortgages provide the investor with a secure investment with a quality return.
First mortgage investments should be entered into only by investors who understand the nature and extent of their investments.
To assist investors in their understanding of first mortgage investments, this brochure provides answers to the twelve most common questions. If you have any further questions or if any of the answers provided in this brochure require further clarification, please consult your advisor.
1. What is First Mortgage Investment?
When an individual lends money to another individual and takes a first mortgage over that person's home or other property, that is known as a first mortgage investment. The mortgage is the security by way of assignment of the property for the payment of the debt.
2. How secure is a first mortgage investment?
Three key elements establish the security:
(i) The value of the borrower's property. Unless you otherwise agree to use a municipal valuation, a professional valuation is obtained from a qualified valuer to ensure that an accurate value of the property is provided.
(ii) The loan to value ratio. A prudent loan is made based on the value of the property. The loan to value ratio without insurance, will not exceed 66.6%, allowing reasonable margin in the event of a forced sale.
(iii) Management. It is essential that the mortgage payments are monitored so that in the event of a delay in payment, appropriate steps can be implemented for recovery.
3. What if a Borrower fails to make payment?
If the Borrower gets into difficulty, there is a mediation process and if it cannot be resolved, a Notice to Pay is issued and then proceedings will be commenced to sell the secured property. Upon sale, expenses associated with the sale are deducted and the balance is used for payment of the investment, plus interest and the final balance is paid to the Borrower.
4. What is a Contributory Mortgage?
It is common to have a Contributory Mortgage where there are two or more contributors to the mortgage. To assist the paper work in respect of such loans, a contributory mortgage will be held in the name of Farm Mortgages Ltd which is a Public Company licensed by the Australian Securities and Investments Commission as a Responsible Entity to carry on the Mortgage Practice carried on for very many years by Arthur E George & Sons.
5. Why don't people borrow from a bank?
There are a variety of reasons for the increasing popularity of private finance. Some of the reasons include:-
* Disenchantment with traditional bank borrowing and its bureaucratic process.
* Requirement for rapid approval and availability.
* Immediate availability of short term finance.
* Interest only advantages of the private finance.
6. Who can invest in a private mortgage?
Any investor is eligible. The investor may be an individual or entity and may include retirees, business people, churches, charities, clubs, friendly societies, self-managed superannuation funds, insurance companies and overseas residents.
7. How long do I need to commit myself to a first mortgage investment?
One of the advantages of fixed interest first mortgage is that it can be a relatively short term investment, (generally for periods up to three years) or it may be longer if you wish.
A first mortgage must be treated as a fixed term investment. However, in the case of an emergency, it is usually possible to recover your investment before the end of the term by finding another investor to take your place. Whilst this cannot be guaranteed, it can be usually arranged by Farm Mortgages Ltd.
8. How much does it cost me to enter into a first mortgage?
There are no entry fees to invest in a first mortgage investment.
All legal and government fees are paid by the borrower at all stages of the investment.
Farm Mortgages Ltd will charge a management fee to the Borrower during the course of the loan.
9. Will I be told where my money is invested?
Yes. You will be sent a copy of the Property Valuation for approval and a Supplementary Product Disclosure Statement Application form with details of the specific mortgage advance and it is only after you have signed and returned the Supplementary Product Disclosure Statement Application form that we can invest your investment.
10. If general interest rates rise or fall, will this affect my return?
Once you have invested in a fixed rate mortgage, the interest is fixed for the life of that mortgage (unless you have chosen a mortgage which is variable annually).
The borrower does not necessarily have the right to pay out the mortgage earlier unless it is referred to in the Supplementary Product Disclosure Statement Application form. If the borrower chooses to pay out the mortgage early, you will generally receive extra interest to compensate you for extra time to reinvest your money into a new mortgage.
11. When is interest paid?
For most private mortgage investments, the interest is paid quarterly in arrears.
The method of payment of interest will be determined by Farm Mortgages Ltd. The interest may be paid by cheque or directly into a bank account chosen by the investor.
12. Can I trust a Responsible Entity such as Farm Mortgages Ltd with my money?
The Federal Government through Australian Securities and Investments Commission impose strict requirements to ensure that consistent procedures are followed.
The client is insured against theft and fraud and negligence by the Responsible Entity.
The insurance threshold currently in place in the event of a claim being sustained against Farm Mortgages Ltd is $5,000,000.00.
All mortgage solicitors have professional indemnity cover against negligence.
In any event, as an investor, you have access at all times to the details of the borrower and the secured property.
