Published: Tue, Dec 1st, 2009 by Mike Newdick
What is a Contributory Mortgage?
A contributory mortgage is where two or more contributors pool financial resources for the purpose of advancing a loan to a borrower which is secured by a registered mortgage over land together with supporting guarantees and such other collateral securities and charges as may be appropriate. These advances are managed by a company on behalf of the contributors. The management company operates a trust account on behalf of the contributors to which their funds are deposited upon receipt for investment, and on repayment pending either being re-advanced to a new borrower or repaid to the contributor.
What are the advantages of a Contributory Mortgage?
There are a number of reasons why a contributory mortgage offers contributors a secure investment which still generates a very fair return for the contributor in today's economic climate.
One of the fundamentals of investment is the spreading of risk. If investing in the share market, it is considered appropriate and prudent to spread investments over a number of companies rather than one or two. Similarly, managed funds will normally manage this risk by investing in shares, bonds and fixed interest securities. A prudent investor may further spread their investment in a number of funds themselves.
The same philosophy lies behind a contributory mortgage in that:
- Investors are able to spread their risk by investing a total of, say $100,000, and having this investment broken up into lots of $10,000, which are invested into separate mortgages;
- The investor contributes to a loan that is secured over specific property rather than forming part of a bulk fund that could be secured over a large number of properties that can change over time without the contributors' knowledge or consent. A contributor who invests in a contributory mortgage can retain a significant degree of control by vetting and approving each investment proposed to them.
- The contributor's consent is required to the investment and before such consent is provided, a valuation report prepared by an independent registered valuer is provided to the contributor for their perusal and approval.
What types of property are accepted as security for Contributory Mortgage loans?
Loans are offered to parties which are able to provide security in the form of residential property. The security will always comprise a first mortgage at no more than:
- 70% of the property's value in the case of a specific authority;
- 66.6% of the property's value in the case of a general authority; or
- 50% of the property's value in the case of vacant land.
All values are established by a registered New Zealand valuer. Lending will not be made in relation to development projects which have caused so much distress in the finance company industry recently.
What is the return a Contributor receives?
One of the main advantages of a contributory mortgage is it develops a very close relationship between the borrower and the lender. This enables each party to avoid the significant costs of a bank or finance company intermediary.
The interest rates offered to contributors are normally significantly above those offered by trading banks and similar institutions. The current rate received by contributors is 8.5% per annum net of all fees and other charges. This is normally paid monthly by the borrower to the management company and then direct credited to the contributor's nominated account.
What information is provided to a Contributor prior to investment?
The decision to invest is made following receipt of an application by a borrower together with a comprehensive package of supporting information that will identify the value of the property being offered as security; the ability of the borrower to meet the repayment obligations under the loan and a credit report of the borrower. The package will include a registered valuation, bank statements, credit report, statement of assets and liabilities, statement of income and expenditure etc.
The decision to recommend the proposal to the contributors is made by a security panel knowledgeable in best practice banking and security assessment. Only when it has passed this initial screening process will an application be forwarded to contributors for their consent. The contributor must receive a copy of the valuation of the property and a brief outline of the proposed investment before they are able to give their consent, unless they choose to provide a general authority which allows investments on their behalf within the agreed parameters without seeking the contributor's consent on each occasion.
We believe contributory mortgage investments are an investment that warrants inclusion in an investment portfolio for individuals seeking a sound return on capital which also provides an opportunity to spread investment risk while still being actively involved in the decision making process relating to their funds.