Mortgage schemes hide risks for unwary

By MARK FRYER

Be careful about putting money into contributory mortgage schemes, investors have been warned.

The Securities Commission issued the caution yesterday, saying such schemes may be high-risk.

"There are 21 contributory mortgage schemes in New Zealand and at the moment we have nine of them before us in one way or another," said the chairman of the commission, Jane Diplock.

"That's nearly half, which is concerning the commission quite significantly."

In some cases the commission's investigations follow investors' complaints about not receiving money they believe they are due, and others have been sparked by the Registrar of Companies.

Contributory mortgage schemes pool money from many investors, and lend it to property owners or developers. The investors then receive a share of the payments made by the borrower.

Some offer returns of as much as 11 per cent, at a time when floating residential mortgage rates are under 7 per cent.

At least $195 million is invested in such schemes, says the commission, though the real figure is probably much higher - possibly twice as much, said Ms Diplock. That doesn't include contributory mortgages through solicitors' nominee companies.

Though some contributory mortgage schemes are well-managed, says the commission, others "are marginal at best".

"People who invest in contributory mortgages should be aware that they might be taking a risk that the banks won't take," said Ms Diplock.

In some cases the offer documents made it hard to work out where the individual investor ranked against other lenders such as banks, and what the risk was.

"For example, the offer may suggest that it is a property that is in existence and tenanted when actually it's still a vacant site and being developed and there are obviously significant risks in development," said Ms Diplock.

The commission says potential investors should take independent advice, rather than rely only on information from scheme promoters.