Mortgage Trusts Weather Fluctuations
Newcastle Herald
Monday April 12, 1999
FOR many investors, market linked investments (unit trusts) can be perplexing as they are continually affected by market conditions.
The value of these investments can rise or fall for no apparent reason.
This is true of many unit trust investments, but usually not for mortgage trusts. The unit price of mortgage trusts is fixed and is not subject to market fluctuations. It is generally $1.
Mortgage trusts allow people to pool their money for lending to individuals or companies who secure their borrowing by first mortgages over real estate.
The trust collects the interest paid on these loans and distributes the interest earned less administration and management charges to the investors.
The trust also retains a percentage of investors' funds in cash and fixed interest investments. This allows the manager the flexibility to meet investors' redemption requests and future loan applications, and allows for the efficient management and administration of the fund.
Mortgage trusts generally do not have entry fees, but exit fees apply frequently. Exit fees generally decrease on a sliding scale over time. The longer the funds are retained in the investment the lower the exit fee. If the investment is held long enough this fee can reduce to nothing.
While the investment return is generally higher there is usually a time lag between when market interest rates change and the investor sees a change in their investment return. This is because the interest rate at which the money is lent is fixed for a period of time and is not reviewed until the end of this fixed term.
In a falling interest rate environment these investments should provide a better return than other fixed term investments.
NICRI is a government-funded, independent consumer agency providing information to the general public on investment products. Contact NICRI on freecall 1800 020-110 or write to PO Box 893, Woden ACT 2606.
© 1999 Newcastle Herald
Share This