The initial investor buys a house, establishing a mortgage, then sells it at a higher price and adds a couple of percentage points onto the interest rate. The buyer acquires both under an agreement to take ownership in, say, 30 years time, effectively renting to buy.
If along the way the buyer defaults on repayments, the original owner keeps the title and any equity the buyer might have built up.
Such schemes are being promoted in New Zealand through seminar tours by US get-rich-quick writer John Burley whose website describes "wrap" mortgages as "perhaps the most exciting real estate strategy ever developed."
The site promises that one can "wrap any existing loan and achieve annual returns on investment of 40% or more."
It explains that "starting out with very little money, a workable plan of action and a lot of desire, John used cash flow principles to create wealth."
Mortgage Brokers Association president Rob Tucker says his organisation has recently become aware of the phenomenon.
"As far as we know, members aren’t promoting them but they have come across them with clients from time to time," Tucker says.
"Most of them seem to be keeping clear of it while others are watching it with a very wary eye."
His advice to MBA members is that when they become aware that wrap mortgaging is going on they have a duty of care to ensure the lender is aware of it.
"It could be an arrangement that would frustrate a mortgagee sale. In some cases, nobody would know a house was on sold and lenders may have difficulty realising on their security," Tucker says.
It appears wrap schemes are also being run for tax advantages and have caught the Inland Revenue Department’s eye.
Margaret Cotton, national manager of technical standards, says the IRD is investigating "upwards of 30, maybe more taxpayers" involved in wrap mortgages who are claiming GST. Such schemes are too recent to have come under scrutiny for income tax or capital gains tax purposes, she says.
Whether or not tax breaks apply isn’t cut and dried, Cotton says. "It very much depends on the contracts and how they’re structured. That’s one of the problems. They’re being altered as some of these issues are being discovered," she says.
