Breakfast cereals and mortgage trusts have some surprising similarities. It's time to take note for your good financial health.

There is certainly no shortage of choice when it comes to breakfast cereals these days. But some cereals are better positioned to kick start your day than others. In fact an expert on nutrition recently claimed that rolled oats is the only cereal worthy of a place on your breakfast table – everything else, she said, was closer to confectionary.

While this opinion may be a bit extreme, it does serve as an important reminder to check the label to ensure that your cereal is suitable for your first meal of the day rather than dessert.

Mortgage trusts can vary greatly, according to Australian Unity Investments Head of Mortgages
Roy Prasad.

"The mortgage trust sector has grown rapidly in recent years and many new products are now available.

"Some of these products are quite high risk, while others only have a few of the characteristics of a 'true' mortgage trust.

"This makes it easy to get confused."

Roy says that the old adage – that there is no such thing as a dumb question – is something investors shouldn't forget when looking at a mortgage trust. 

"The recent collapse of mortgage-backed securities offered by Westpoint, Fincorp and most recently Australian Capital Reserve serve as a reminder of the importance of understanding what you are investing in.

"It would be a great pity if these examples were to taint the mortgage sector as a whole.

"To shy away from the mortgage sector because of poorly managed products means you could be denying yourself access to some sound income investments," he says.

"That's why it's so important to ask the right questions and understand exactly what you're investing in. As anyone who watches their diet knows, it always pays to read the label." 

Mortgage trusts explained 

A mortgage trust works by pooling the investments of many individuals, which are then loaned to a number of property owners.

So, by investing in a mortgage trust you effectively take on the role of a lender.

Interest paid to the trust is used to pay income to investors. And loans made by the trust are secured by a mortgage, which means the trust can take possession of the property if the borrower can't meet repayments.

Well-managed mortgage trusts benefit investors in a number of ways:

• steady source of income
• relatively low risk investment, backed by the security of 'bricks and mortar'
• good interest rate that is generally better than bank term deposits, with no fixed term.

Roy says that quality mortgage trusts can be a good choice for low risk investors seeking an income.

"Australian Unity Investments has been managing these products for almost a decade. In that time we have shown that mortgage trusts can consistently produce sound income for conservative investors."

Increased risk for higher return 

Recent developments in the mortgage trust sector have resulted in increased risk for investors in some products.

"Additional risk has been added to some products in a controlled way to give investors the opportunity to seek higher returns," says Roy.

"We have been part of this trend, with the addition of the Australian Unity Investments High Yield Mortgage Trust in 2005.

"It operates alongside our conservative fund and gives investors the choice to seek a higher return, for additional risk, but still with the characteristics of a mortgage fund.

"New mortgage trust managers have also launched products in recent times, some with quite high risks and the promise of high returns.

"This means investors now have a wide spectrum of products from which to choose, although it's not easy to tell the difference at a glance."

Look for trusted brands as interest rates rise 

Roy says rising interest rates will also raise risk levels.

"In theory, rising rates are good for mortgage trust investors because the manager can increase lending rates.

"They can then pass this back to investors in the form of higher returns. But rising rates also mean increased costs for borrowers from the trust, and this can mean trouble if they can't meet higher repayments.

"The current upward cycle of interest rates will therefore be an interesting test of the quality of some of the higher risk mortgage trusts.

"In times like these, proven and conservative managers such as Australian Unity Investments will come into their own."  

Key checkpoints when investing in a mortgage trust

If returns seem too good to be true, then they probably are.
Roy says that it's the most basic rule of all but is often forgotten when investing.

"For example, I believe that double-digit returns from mortgage funds are very difficult to justify. In order to produce returns of 10 percent per annum – or higher – the risk involved far outweighs the returns for investors."

The "loan to valuation ratio" (LVR) should be no more than 70 percent for conservative funds and 85 percent for high yield funds.
The LVR is a good indicator of a mortgage trust's risk profile.  This compares the value of all loans against all properties in the fund, and should be provided in the fund's Product Disclosure Statement.

"The lower the ratio, the more equity available if problems arise. High yield mortgage trusts set out to produce bigger returns than conservative funds, so they do come with more risk," Roy says.

Check investor entitlements.
Conservative mortgage funds hold only first mortgages, while more risky funds, such as mezzanine funds, largely invest in second mortgages to produce a higher rate of return.

"Investors are further down the list of creditors and run a higher risk of not getting any of their money back if anything goes wrong," Roy says.

Consider the spread of loans.
Roy says that if a fund allocates 50 percent or more of the portfolio to construction and development loans, then alarm bells should sound. "In the current property climate, these types of investments are very risky."

Check what the experts say.
Researchers are a very reliable source of useful information about a product. "They also rate products to help investors compare similar funds such as mortgage funds," says Roy.

For more information about our High Yield Mortgage Trust or Mortgage Income Trust, call us on 13 29 39,
visit www.australianunity.com.au, or speak to your financial advisor.

Important information

This information has been prepared by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454. It contains general information only and does not take into account your individual objectives, personal circumstances, financial situation or needs. While every care has been taken in the preparation of this information, we reserve the right to make corrections. You should seek your own financial advice from a financial services licensee or an authorised representative and you should read the relevant, current Product Disclosure Statement (PDS) before deciding whether to acquire or to continue to hold a product.

You can obtain a copy of the current PDS by visiting www.australianunity.com.au or by calling 13 29 39.