A financial advisory firm has raised $1.6 million via a fractional investment platform to fund a mortgage-backed loan.
DomaCom’s investment platform was used by Newcastle-based Shartru Wealth Management (Shartru) to raise $1.6 million for a retired client to purchase a residential property in Melbourne.
The amount was raised across two crowdfunding campaigns: $682,000 was raised in one campaign to cover the equity component of the loan, while the remaining $948,000 debt was raised in another campaign.
DomaCom stated in a disclosure to the ASX that its platform has enabled Shartru to “satisfy the growth needs of their accumulation clients as well as the income needs of their retiree clients”.
“An investment option returning 5.06 per cent and secured by first registered mortgage with a low LVR [of 60 per cent] is attractive in today’s environment where retirees are lucky to receive a 2.5 per cent return from term deposits,” Shartru Wealth CEO Rob Coyte said.
Speaking to The Adviser, DomaCom CEO Arthur Naoumidis said that the problem for today’s retirees is that when they had their financial plans established a decade or so ago, the forecast for income growth was 5 per cent, which is significantly higher than the recently recorded rate of 0.7 per cent (for the three years leading to December 2017).
“A return of 2.5 per cent [from term deposits] is not enough,” the CEO said. “If you’re a retiree, your capital is supposed to last you all your life, and all of a sudden it’s not covering itself, so you’re eating your capital to live. There’s a big hunt for yield, but retirees don’t want to take risks; they don’t want to invest in equities because you’re taking on capital risk.”
How crowdfunding works for mortgage-backed loans
Mr Naoumidis explained that Australians can raise money for existing or future properties using both equity and debt via the fintech platform.
Users are required to fill out details such as the minimum acceptable pledge amount (DomaCom's minimum is $2,200), the debt-to-loan ratio, the total amount to be raised and a description of the campaign.
The user will have a number of options when it comes to who they borrow from. For example, they can choose to arrange their own loans (an option used primarily by financial advisers), use the DomaCom Fund, select the default lender or broking firm established by DomaCom, or choose their own third-parties to organise the loan.
Investors are required to fund their pledges once there is enough interest in the campaign, and the purchasing process begins as soon as the campaign is 30 per cent funded.
There is also a liquidity facility for existing property investors who want to sell units online in a similar way to how they would sell shares.
New opportunities for mortgage brokers
The rise in fractional property investment activity presents a compelling opportunity for mortgage brokers to cater to home buyers of the future, the CEO told The Advsier.
According to research from the University of South Australia, younger Australians (aged between 18 and 24) are more likely to engage in online fractional property investment than those between the ages of 25 and 34.
Mr Naoumidis said that younger users are more likely to live in the property they set up a crowdfunding campaign for due to soaring prices in capital cities. Such users would have to apply for tenancy as per usual, but they will be considered a priority tenant, the CEO explained.
“It’s viewed that someone with an equity interest in the underlying investment vehicle is probably going to look after the place better than someone who’s not,” the CEO added.
A portion of the rent will also be offset by the returns the tenant receives as an investor in the property they’re leasing, Mr Naoumidis noted.
He highlighted the opportunity for mortgage brokers to help home owners leverage their current home to fund a new investment property or build a new home in their dream suburb.
In the future, Mr Naoumidis said users will be able to use DomaCom to select blocks in a chosen suburb (using a map-like interface) that appear to be underdeveloped and find out whether any are on sale. If the land is on sale, the user will be able to launch a crowdfunding campaign to fund the purchase of the land and the development of property on top of it.