Questions & Answers
Q: Why invest in a Mortgage Fund?
A: Hypoteket Mortgage Funds offer an increasingly attractive alternative to traditional Fixed Income products such as Covered Bonds, where yields have all but vanished entirely since the Riksbank started buying them on large scale this spring. The underlying assets are very similar, a portfolio of residential mortgages with low Loan to Value, but the running yield is substantially higher in our funds.
Q: Why Hypoteket?
A: As one of the first to launch a Mortgage Fund in Sweden, and one of few who have actually gotten started issuing/investing under this structure to date, we do have a track record on the funds and proof of concept from our investors. We also offer flexible solutions with tailoring possibilities on request, within the scope of regulation requirements. The coupon calculation method offer investor benefits such as transparency, stickiness and independence from the originator.
Q: What is the structure of the investment?
A: Our funds are basically structured as RMBSs, but with only one tranche. All investors share the same seniority in the structure - coupons as well as any potential losses are distributed pro rata. Risk is kept low as we allow a maximum of 65% LTV on investable mortgages with thorough credit processes (Average LTV is around 50% in Fund 2). To date, there are no credit losses in the funds. The investment has a commitment/draw down feature.
Q: What is the maturity of the investment?
A: Regulators stipulate long investor commitments in order to reduce refinancing risks. The minimum required length is 10 years. Mortgage fund 2 is written as 15 years. The actual maturity is however likely to be shorter as there is an amortizing profile on a mortgage fund due to amortizations and mortgage turnover. The average length of a Swedish mortgage today is estimated at around 7 years*. At Hypoteket, investors can decide on whether to reinvest or reclaim repaid loans.
*According to Finansinspektionen, 2019
Q: What yield can I expect?
A: We can not say what the yield will be going forward, but so far it has been close to one percent. The coupon is floating with monthly resets (and payouts) and will depend on how actual average mortgage rates (among the largest lenders) fluctuate over time. We believe it will prove to be fairly sticky, as commercial banks seem inclined to defend their margins. For instance, so far this year our benchmark index has moved rather little while 3m Stibor has plunged by more than 40bps since the peak around March. We do also think this spread could widen further, should the Riksbank for instance decide to cut the policy rate.
Q: Where can I learn more about the Swedish residential mortgage market?
A: The reports on the Swedish Mortgage Market by Finansinspektionen (the Swedish FSA), published yearly, could be a good place to start. https://www.fi.se/en/published/reports/swedish-mortgage-reports/