Investing in Pool Mortgages rather than ISA

karimkhan

Hi,

I should mention I am currently living in Australia but am from the UK also I have never invested before and have only put money the bank and so would really appreciate some sound advice.

I have a ISA account and have around 22,000 pounds in it however I am only getting 1.25% interest. I am now an Australian resident and am considering converting the money into dollars and investing it with La Trobe into their Pool Mortgages option. I don’t really understand the investment to be completely honest but from what I gather it is a low to medium risk and offers around 5% interest and in the past three years it has delivered >5%.
Is it advisable to do this, or is it quite risky and not really worth the gain? From my rough calculations, the difference in interest I would get is 3.75% (5-1.25) and this would give an extra 825 pounds, which doesn’t seem like that much more if its risky and also taking into account that I will have to exchange money from pounds to dollars and the interest in the latter approach is not tax-free. Taking this into account is it worthwhile doing this or should I just leave it till something better comes along?

I guess I should also mention my current situation. I have around 85,000 in Australia with ubank which earns 3.62% interest. I am still currently studying and work only part time in an office and for my self an make no more than 2000 a month. I do plan on graduating at the end of this year and getting back into full time work then, so tax on interest may become a bigger issue. I am currently renting an apartment with my partner, and my share of the rent is roughly 500pounds a month. My monthly expenditure on top of rent is between 250-500 and so I am currently saving no more than 1000 pounds a month. I guess eventually I would like to maybe buy a house if it’s a wise investment option. Apart from that, I have no immediate plans for my savings. In the long term I don’t know if I will stay in Australia or go back home but I like it in Australia and been here for 5 years now so it is likely I will remain here. Anyway back onto track, should I convert my savings into dollars and invest with Pool mortgages with La Trobe? Has anyone got any experience/insight with pool mortgages or La Trobe

bowlhead99

So to summarise:

- You are UK person living in Australia.

- You may or may not come back to the UK and you may or may not buy a house

- You currently have some cash in UK and some cash in Australia.

- You have noticed that interest rates are higher in Australia (over here we have a central bank base rate of 0.5% and over there you have a central bank base rate of 2.25%). Your savings rate on your dollars is 3.62 while in UK it's lower.

OK, so at this point there is a standard comment to make that simply moving money from one country to another where interest rates are different, doesn't generally create any wealth. If higher interest rates in Australia were a free ride to riches, everyone in the UK would be putting their money there and not here. The reality is that the movement in exchange rates over time will typically cancel these out.

In 2001 there were 3 dollars to a pound.
For most of 2003-2005 there were 2.5 dollars to a pound
For most of 2011-2012 there were 1.5 dollars to a pound
Now there's closer to 1.95 dollars to a pound.

So you could find that £20000 + 1.3% for a couple of years is no more or less than $39000 + 3.6% for a couple of years. The pile of pounds sterling might easily end up being worth 10-20% more or 10-20% less than the dollars, so the extra couple of percent interest rate is neither here nor there. If rates move back to 3:1, your $40k is worth £13k; if rates move back to 1.5:1, your $40k is worth twice as much, £26k. But basically unless you know more than 'the market', which you don't, you should probably assume that the general interest rate differential between the two economies will get wiped out by currency movements because over the long term their interest rates will probably move to be about the same as each other and that would make sterling strengthen. While in the short term anything could happen and it's a gamble.

So, your sterling is not really 'losing' value compared to your dollars. The question is, where do you actually want to have your money, which depends whether you ever really want to come back to the UK. If you have no expected UK expenses, you can bring it all over to Aus, pay the one-off currency fee and just get on with living your life in dollars. If you will be back to the UK in the long term and could burn £20k on five years of holidays to the UK anyway, there is no point paying to convert into AU$ just to pay later to convert back the other way and meanwhile take an exchange rate risk on the rates moving against you.

If you've decided that Australia is the place to have your cash and investments, then you can consider whether the money should be in the bank, in an investment fund that you don't understand which invests in mortgages, or an investment fund that you don't understand which invests in shares of companies, or any other kind of investment scheme which you do or don't understand.

Basically, it is not a fair comparison to say UK bank account vs AUS investment. Because of the currencies and general interest rate differentials involved. What you should be looking at is the AUS bank account vs the AUS investment. You can get 3.6% risk free, or you can take risk and aim to get 5%.

You already have $80k which you could be investing, if investment risk and higher-returns- than-cash is something that interests you. If your part time income is $25k a year (or £25k a year?) and you have $80k on deposit, that seems like more savings than you need for the short term and you should probably look at investing - although it's not clear whether the 80k in your aussie bank is $ or £. But if you need it for a house deposit in a few years, or to maintain flexibility for an international lifestyle and future relocations, maybe not.

The fund invests directly or indirectly in mortgage loans, so the main risks with the 5% is that:

- the people or businesses that have borrowed money from the fund do not pay it back, causing the capital lent to the borrower and the interest expected from the borrower to be lost. The loan is hopefully being made at 70% loan-to-value on the property it's secured against, but this doesn't mean they can sell the property for more than that 70% if they've made an error of judgement or if there is a property crash);

- the prevailing interest rates in the market change;

- there is a liquidity mismatch in the fund because money has been lent to a borrower for 20 years and the people putting money in the fund want their money back in 6 months or 1 year or 2 years because of other opportunities in the market (such as an equities crash making shares much more attractive than mortgages) - this could mean that the otherwise healthy and profitable fund is not solvent and can't pay out to investors when it needs to.

Generally because the fund is investing in fixed loans it is in the 'lower risk' area of investment funds; it is less risky than them buying ownership interest in individual stock market listed companies which could double in value or go bust. But it is not zero risk, which is why the returns are higher than your bank account.

In summary:
1) divorce the two ideas in your mind of having your £20k cash in UK vs Aus, from whether you should hold it in cash savings vs investments

2) consider generally how much you can afford to lose in pursuit of higher returns, and how much that means you can afford to invest. It might be $5000 or $50000.

3) don't invest in something that you "don't really understand to be honest". We are not all financial gurus and the workings of investment funds are not straightforward, whether they invest in pools of mortgage borrowings or anything else. But you should at least be able to understand what could cause a fund to make or lose money and whether you are comfortable with that.

4) you mention the investment fund suggests 5% returns and that returns in recent years were higher than 5%. But interest rates in recent years were higher than 5% (before and following the 'credit crunch') so past performance isn't an indicator that they can still make that level of return after expenses. The running costs / management fee of the fund do not go away when rates change, and you can now get personal and commercial mortgages for the 4-6% range so people lending the money are no longer making huge returns.

This is not to suggest you will lose money by investing with Latrobe, and certainly if you keep your money in a risk free account you will not receive any more than a bare minimum return; but just a reminder there are no guarantees in life, no such thing as a free lunch.

karimkhan

Hi,
Thanks for your very detailed reply. Sorry I should have mentioned all the above mentioned values are in GBP (i.e I have 22,000 GBP in an ISA account, 85,000 GBP in UBank in Australia ($170,000), my income currently is 24,000 GBP and iving cost is around 1000GBP a month so I aim to save at least 1000GBP a month).

OK so from what I gather from your advise, I have decided there is no point in converting my savings from the UK to dollars as I unsure wether I will remain in Australia long term so I should just keep the 20,000 pounds in the ISA for now and not really think about it.

Regarding investing the savings I have Australia, even though I am fairly young I don't think I would like to take any risk with my savings by investing them. Specially as I worked so hard in an industry I hated, just to get to where I am now. I would rather they grew slowly but at least there would be little risk involved. I don't understand finance/investment greatly and even when I try do some reading on the topic I get easily confused.

So I think it is better for me just to continue saving as much as possible with the banks till I decide or should I say if I decide to buy a house. Is that the most advisable coarse of action for me?

Jonbvn

karimkhan wrote: »

Hi,

I don’t really understand the investment to be completely honest ....

This tells you everything you need to know.

kidmugsy

I really wouldn't rush to invest in property in Australia, especially if I didn't understand the detail of the investment. In fact I'd run a kilometre.

Thrugelmir

karimkhan wrote: »

I don’t really understand the investment to be completely honest

One of the 10 cardinal rules of investing is to understand what you are investing in. Not least that you won't know when it's time to head for the exit doors before it's too late.