Individuals often wish to invest their hard earned money in a manner that will maximize returns. It is well understood that the key to good and safe investment is to diversify your investments. By investing your money in various schemes you are diversifying your portfolio and therefore minimizing the risk. The look-out for new and profitable ventures for investment is relentless. Many new forms of investments are tried by investors to suit their differing financial goals.

Investment in private mortgages is a form of investment that is gaining in popularity. Here an investor lends money to another person, who pledges his property as a security. Mortgage brokers are available to conclude such deals. The investor receives regular interest on the mortgage and at the end of the mortgage term gets back the principal amount loaned. To a person looking for a fixed monthly income this investment option is attractive.

Certain issues to be understood

It is important to clearly understand a few issues before entering into a mortgage deal -

• Mortgages can be high risk investment. Does it suit your risk appetite

• Mortgage investments are not insured by the Government.

• Inexperienced and uninformed investors should avoid such investment

• Mortgage broker also cannot guarantee a mortgage investment

• When the borrower stops paying the mortgage broker will automatically stop payments to the investor

• Mortgage investments are not very liquid and cannot be sold in a hurry to meet some urgent monetary requirement

Investment Risks

The value of an investment in a mortgage and the potential income that it generates may fluctuate. The risks that the investor will be exposed to are :

1. The borrower may default in monthly payments

2. The borrower may not be able to make the final lump sum principal payment at the end of the mortgage term

3. In case the borrower defaults in repayment of the principal and the property has to be sold to recover the money, the investor will suffer if property prices have come down in the intervening period

4. If interest rates increase during the term of the mortgage and the mortgage is a fixed rate one, then the investor loses out on better opportunities

Information to be obtained

Before finalizing the deal the investor should make sure that the mortgage broker has provided him with the following minimum information :

• A description of the property to be mortgaged

• Terms and conditions of the mortgage

• All prior claims on the property, like, other mortgages, any tax owed etc

• Information on the borrower, especially his ability to repay the loan

• Any connection or relationship the broker may have with the borrower

• Any interest the broker has in the property

• The brokers fees

Appraisal of the value of the Property

Since the possibility of the borrower not being able to repay the principal amount is very real, it is important to pay due attention to the appraisal of the value of the property. This becomes important when the property has to be sold to recover the initial amount. So, make sure that the value of the property is supported by an up-to-date appraisal performed by an independent appraisal authority. If you have any doubts then hire an appraiser and get a second opinion.

Some points regarding the borrower

Since the safety of your investment depends on the integrity and the financial capacity of the borrower, before entering into the transaction satisfy yourself that the borrower will repay the loan.

If the borrower is offering a rate of interest that is much higher than the prevalent market rates, dont jump for the deal. Here there may be cause for worry and the borrower must be a high risk one. Remember there are no free lunches and when deals look too good to be true, they probably are so.

Ascertain the fees paid by the borrower to the broker, if it is much higher than normal fees then you may be dealing with a high risk borrower.

Mortgage Schemes

If the idea of mortgages as investments appeal to you but you feel you are not expert enough to understand the risks properly, you can leave the task to experts by investing in Mortgage Schemes. Here several persons contribute money and this pooled resource is used to invest in mortgages, whereby the scheme members give up day to day control over the scheme, which is taken care of by the experts.

The investors receive regular income from the interest payments received from the borrowers and the capital is received when the principal is paid back by them.

Such investments carry the added benefit of diversification and so minimization of risks. Since a huge pool of money is created, the amount can be invested in several mortgages and so result in minimization of risks. It is always prudent not to put all your eggs in one basket. Coupled with the fact that whole time experts are monitoring the investment, the risk is definitely lower than what it would be for an individual investing in one single mortgage. However, before investing, care should be taken to evaluate the persons behind the scheme and go in for well known ones. Although risks are minimized due to the process of diversification such investments are still susceptible to the risks that are applicable for direct mortgage investments as mentioned above.

Conclusion

For diversifying ones portfolio investment mortgages provide a good option. It is always prudent to have some investments that give a fixed monthly income. Based on these returns one can take on higher risks in other investment categories. However, often people wrongly assume that just because the property is pledged to the lender such investments are no risk ones. This is a misconception and it needs to be understood that investment mortgages are high risk investments. Real estate is not a liquid asset and selling the property incase of default in principal repayment can be a big problem. One should enter into this investment option after clearly understanding the pros and cons.