Are High Returns Too Good To Be True?
JUNO Partner story
18 October 2021
Brenda Ward talks to Alpha First Mortgages’ Olivia Fraser about returns of 7 to 8.5 per cent.
With trading banks offering depositors interest rates at 2 per cent and less, is an investment paying 7 to 8.5 per cent simply too good to be true?
Alpha First Mortgages Director Olivia Fraser says it’s not. She explains why the company’s investors are getting such excellent returns – and whether that means they must be taking on too much risk.
The key is that Alpha First mortgages fund commercial property, residential developments, farms and horticulture, and land development for borrowers, says Fraser.
For these groups, lending interest rates are already much higher from banks and non-bank lenders than retail borrowers get. And they’re structured differently, too.
“We’re mainly lending to small-scale developers, builders doing several townhouses on a site, or people building childcare centres, for example.
“We’re not lending in a retail environment where low mortgage rates of 2 per cent are now commonplace,” she says.
“These are not principal-and-interest 30-year first mortgages on mum and dad’s home. We’re doing commercial loans only to capable borrowers, who only pay the interest on the loan and repay it at the end of the term.”
Non-bank lending at 7 to 8 per cent is very competitive. Many investors like investing in a property-related investment, which helps them to diversify (spread their risk).
What’s the risk level?
That still sounds like an amazing return. Are the loans high-risk?
Fraser says: “In fact, we tend to be conservative with our loan-to-value ratios and always ensure that our security position is conservative. We don’t lend to people with a bad credit history.”
Who typically invests in property mortgages?
“We have a diverse range of registered investors, from pilots, family trusts, professional investors, retired farmers, lawyers, accountants, and retired or nearly retired people, to people who have recently sold rental properties, and investors who have accumulated wealth over a long period of hard work.
“All our investors have one thing in common, which is they cannot rely on bank deposit rates to fund their living costs and maintain their lifestyle.
“They may also have to wait for bank interest at the end of a term deposit, but we pay interest monthly, without any deduction for fees or costs.”
You must be eligible
So, is there a catch? There are a couple of conditions, says Fraser. You need a minimum of NZ$50,000 to invest and only experienced investors can invest with Alpha First Mortgages.
Explains Fraser: “You do need to qualify as either ‘eligible’ or ‘wholesale’. There are wholesale criteria in the Financial Markets Conducts Act 2013, or investors can register by the ‘eligible’ criteria. That assumes someone is eligible because they have investment experience and are capable of making their own investment decisions.
“They may have bought and sold property, or financial products. That could be rental properties, shares, or term deposits they’ve been using to earn an income. And they need to know what level of information they need to make an informed decision.
“Somebody might not have a portfolio meeting one of the wholesale criteria of NZ$1 million in specified financial products, but they may be very qualified to assess the merits and risks of any opportunity.
"So, they can register with Alpha First as an ‘eligible’ investor. They need an accountant or solicitor that knows them and their experience to certify their eligibility, and verify the information provided to us.”
How to apply
“We can only offer our first-mortgage opportunities to our registered investors, and once they register, the process, the security and all the investment information is fully transparent," says Fraser.
“We do detailed and stringent due diligence on every loan, interview every borrower, and inspect every security property. We package for investors all the information we assess to make our lending decision, and a full executive summary, and forward that to them.”
This includes complete and detailed information about the loan security and the borrower.
Fraser says: “We provide to the investors everything we’ve used to make our lending decision.
"They know where the property is, who’s borrowing the money, what the loan is for, the structure, how long it’s for, absolutely everything.”
Alpha First welcomes enquiries. Go to www.alphafirst.co.nz, to get started.
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