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Fixed Interest – risk and return - Southern Cross Financial Contributory Mortgages (6.50% pa)

Over the last few years, we have noticed the increasing risks of bonds and capital notes issued through stockbrokers.  As the risk free (and reference) interest rates have been low, the returns that have been offered in return for the risk involved has been very low.  (Refer to Fixed interest – risk and return – CoCo’s and bank hybrids).


Most of these issues have been provided in an environment where investors can choose to seek advice on the suitability of these investments for their situation.

In contrast, we were interested to note an advertisement in the NZ Herald for Southern Cross Financial Contributory Mortgages last week.

Features of the investment:

  • Investment rate from 6.50%
  • Flexible Terms 6-12 months
  • Minimum investment $50,000
  • First Mortgage secured, over residential property
  • Zero Fees

This information is highlighted and dominant in the advertisement.  In small print it is noted that this is a Contributory Mortgage Investment.

How should you analyse this investment and whether it is suitable for you?

  1. Ask why the interest rate is so much higher than you can get at a bank.

As both this investment and a bank investment are related to lending by a first mortgage secured by residential property – why is this return around double what the bank will give you?

  1. Ask who are Southern Cross Financial and why are they offering such a high relative rate? Have any investors lost any funds investing through this organisation in the past?

  1. Why is the minimum investment $50,000? notes that these investments are contributory mortgages, and you choose the investment that suits you.  Southern Cross ‘matches you with a borrower how has a need to raise funds against their property’.

Questions to ask:

  1. Why is the borrower borrowing through Southern Cross and not a mainstream bank? What are the reasons?
  2. What is the extra risk involved with this borrower?
  3. Who is providing the registered valuation report on the property? Are they independent of the borrower and SCFL? Who pays for this report?
  4. Why are the loan terms so short? (6 months, 12 months)
  1. What are the risks in this investment as compared to a bank term deposit?

Note that SCFL compare their returns to Bank Term Deposits – however, they do not mention the additional risks of these Contributory Mortgage investment.

  1. There is no credit rating on each of these individual investments – so how can you assess the risk of where you are investing?
  2. What is the Loan to Value Ratio of the investment you are looking at?
  3. How do you get your money out if the borrower can’t pay the interest or the lump sum borrowed?
  4. What happens if they default – how long will it take for a mortgagee sale to recoup your funds? What interest will you earn in the meantime?
  5. What fees are involved if the property has to be sold in a mortgage sale? Who pays these fees?
  6. What happens if the nominee that holds your investment gets into trouble? What safeguards are you in relation to this nominee company?
  1. Why are there no fees involved in setting up this investment with SCFL?

    1. As you are lending money to a borrower, there will be legal documentation required. Who is paying for these costs?
    2. How does SCFL make it’s money out of the deal if there are no fees payable by you?


It is easy over time to forget the lessons of history.  As low risk returns fall, investors seek higher returns without fully understanding the risks associated with these returns.  It is less than 8 years since hundreds of millions of dollars have been lost in defaults on finance companies – where the risk was higher than investors understood.

Moneyworks would not recommend this investment to any of our clients, no matter how big their portfolio.  We consider that this risk is not proportionate to the potential return on the investment.

If you would like to discuss the options of creating a well diversified portfolio and a plan for managing your retirement capital with one of Moneyworks Financial Planners, contact us by clicking here.

If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.


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