On The Income Trail

At a time of ultra-low interest rates, it’s still possible to get a decent return without taking unnecessary risks

- Terry Ryder

A combination of factors has driven greater investment in mortgage trusts, but the industry believes Australians remain under-invested in this sector. Retirees, people with self-managed super funds and others seeking capital stability as well as consistent income have pushed the recent growth, while the credit squeeze by the major banks has provided opportunities for the non-bank sector to offer good returns at reasonable risk.

At the same time, according to Louis Christopher, managing director at SQM Research, the chase for yield has increased the risk appetite of investors.

“Mortgage trusts are attracting borrowers on a slightly higher risk spectrum, paying 5%-6% or a little higher,” he says. “It doesn’t mean the borrowers are problematic but banks have restricted lending to mums and dads and have also been hard on self-employed people.”

Because the major banks have been tightening their criteria and screening borrowers more stringently, the non-bank sector has picked up some “very good risk-free loans”.

“Often they’re borrowers who have gone through that tougher experience with the major banks and are fed up, so they’re willing to pay a little bit more for the greater convenience,” says Christopher.

Who’s investing?

Chris Andrews, senior vice-president and chief investment officer at La Trobe Financial Services, says the mortgage trust product is a natural fit for older investors.

“Classic investment theory states that an investor should ‘own their age’ in fixed-income investments,” he says. “That is, the older you are, the more your portfolio should be tilted towards capital-stable, income-producing investments.

“A 60-year-old should have 60% of their portfolio in such investments, a 70-year-old should have 70%, and so on.”