You need to remember that banks are not the only entities that...

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    You need to remember that banks are not the only entities that lend. There are a wide range of other lenders both ADI and non-ADI that businesses and landlords/developers utilise. Often, borrowers need multiple facilities and see it as prudent to spread risk among a range of lenders (risk being that a borrower cannot extend additional finance or has caps on how much they can lend to a single borrower). So the fact that they are not borrowing from a bank per se is not in itself a red flag. Indeed, they can often get better rates from other lenders who do not have shareholders to support!

    You also cannot assume the rates quoted on AU's site are higher than what banks charge. Banks do not advertise what they will charge developers, each rate is tailored on the proposal. It's not the same as home loan rates. Developments carry higher risks than that for stabilised assets.

    Investing in mortgages is perfectly valid, but you need to be aware of the different types of funds. Firstly you have Pooled Mortgage Funds like La Trobe Australian Mortgage Fund which has a very large diversified book of mortgages to spread default risk. Then you have Contributory Mortgage Funds which is what AU is doing (I assume you are actually referring to AU's Select Income Fund?). A Contributory Fund invests in a single mortgage each time, so you obviously have significantly greater risk due to concentration of your investment. This is not necessarily bad, but you need to ensure you have sufficient expertise to analyse the proposition, particularly if it is a development project. Both structures have pros and cons.

    Personally, I don't think contributory mortgages are appropriate for newcomers. But it's up to the individual obviously.
 
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