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How our investments differ from bank term deposits

Our investment team is often asked to help identify the key differences between an investment with First Mortgage Trust (FMT) as compared to a standard bank term deposit.  Many of our investors compare what we offer to a bank term deposit, even though they are quite different products.

While it is evident that each investment type carries its own characteristics and risks, many are not familiar with the underlying dynamics of each.

Key features of a bank term deposit

In simple terms, bank term deposits are a type of investment where someone invests a set amount of money with a bank for a nominated and agreed fixed term.  In exchange, they receive a known rate of interest (less tax) which they can either consolidate back into the investment or have it paid out at agreed times.  The key benefits for investors are certainty of return and relative low risk.

While bank term deposits can be attractive to some investors, some of the acknowledged drawbacks are:

  • Generally, bank term deposits provide a lower return compared to other investments (this is the main trade off you make for lower risk).
  • There is a lack of liquidity in that your money is tied up until the investment matures (although you can often break a term deposit by giving a period of notice to your bank, in exchange for a lower interest rate).
  • Inflation risk – in an inflationary environment, a lower interest rate (compared to inflation), may mean that your purchasing power is dropping over time.
  • There is an opportunity cost of not necessarily having the funds readily available to invest elsewhere should such opportunities come along.

It is within this context that we see and speak to many investors who are seeking to diversify their investments into a range of other investment options, including those offered by FMT.

Key features of an investment with FMT

FMT is not a registered bank but is New Zealand’s fourth largest non-bank lender and has been helping kiwis on their investment and property finance journey for over 27 years. To understand how FMT differs from bank term deposits, it is important to recognise that we are a managed investment scheme, which means that investor funds are pooled together in a Trust, with a management company (in our case First Mortgage Managers Limited) appointed to manage the Trust and select suitable investing opportunities in accordance with the trust deed.

Funds received from our investors are invested by the Trust into a portfolio of first mortgages secured over selected land and buildings across New Zealand (with some cash and fixed interest investments also held for liquidity).  Every loan made by FMT is carefully considered by our lending team in the context of the sector, geographical area, values and attributes of the borrower and the fundamentals of the lending opportunity based on our conservative loan to value ratios.

Income generated from the mortgages is received by the Trust and distributed, after fees and tax are deducted, to investors in the form of quarterly payments. These are paid out or added to the capital in accordance with each investor’s instructions. Because distributions are based on the income generated from the Trust’s mortgage investments, the level of distributions is not fixed. Instead, distributions go up and down over time. This is a significant difference between an investment with FMT and a bank term deposit.

One of the key features of the FMT model is the funds are not locked in for a specific term, although we do encourage investments are for a minimum of two years. The accessibility of funds has proven particularly popular with our retiree investor base who often want to use some of their savings as a regular top up their superannuation.  Others choose to keep their capital intact but will contact us to make one-off drawdowns to suit their individual circumstances.  We generally action withdrawals within four business days of receiving a request, but in limited circumstances we have the ability under our trust deed to delay or suspend withdrawals.

Regardless of your decision for investment type, all do carry risk. For FMT, there is a risk that borrowers from the Trust may not repay their loans, which could result in the Trust suffering a loss.  There is more risk associated with investing with FMT that there is with investing in a bank term deposit. However, the key to our longstanding consistent performance has been the first-mortgage investment security we require when lending and our lending process with its many internal and external checks and balances before loans are approved.

Peace of mind investing

Such is our historical performance, that no FMT investor has ever lost any capital, including through the Global Financial Crisis and the Covid-19 pandemic.  While past performance is not a reliable indicator of future performance and there can be no assurance that investor capital won’t be lost in the future, our historical performance remains something that we are very proud of.

Everyone’s investment needs and journey differ

Ultimately, when you are choosing bank term deposits or other investments like FMT, your decision comes down to your own personal situation and requirements.   Considerations to bear in mind are the potential return on your investment, the level of risk that you are comfortable with, diversification within your own personal investment strategy, your need for access to your money, and the quality of the investment management team who will be entrusted to act on your behalf.

If you need more information to support your decision making, you should speak to a financial adviser (FMT does not provide financial advice).

Why invest with us?

We know risk is a major consideration when deciding where to invest. With FMT our investments are backed by first mortgages over land and buildings. Property-based securities traditionally provide some of the least volatile investments. In addition, the funds always hold cash investments (liquidity) with New Zealand banks to help ensure cash is available to repay investors when needed.

Learn more about investing with FMT

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