Mortgage funds with low entry costs
Mortgage funds are popular with seasoned investors who have diversified portfolios and often a few runs on the board when it comes to investing. But mortgage funds also provide great opportunities for new investors.
Those looking for an alternative to traditional first investment strategies such as purchasing an individual property. With the current inflated property market in Australia limiting options for new and low-level investment, mortgage funds are a real possibility for those looking to invest from an early age.
Finding out how to invest in a mortgage fund to suit your budget, situation and age make sense. That way you’ll maximise the benefits of this flexible investment alternative.
What is a mortgage investment fund?
A mortgage fund is a type of investment product. In Australia, mortgage funds are structured as a managed investment scheme.
A mortgage fund (also known as a ‘mortgage trust’) is where money from various investors is pooled together and lent out to borrowers. Mortgage funds are managed by a professional fund manager (or mortgage manager), who pays the investors a regular income based on the interest rate paid by the borrowers.
As an investor, you are “loaning” money to the fund. Borrowers then use those funds to purchase property or fund business activities. You’ll then receive a regular income stream (distributions) from the fund manager that is secured by mortgages over the properties.
Mortgage funds benefit borrowers as they are a useful, convenient source of funding with fewer hassles than applying to major banks for loans.
Can young people invest in mortgage funds?
Mortgage funds provide young people with opportunities other investments don’t. Young people have their own challenges when it comes to investing.
- Minimal savings
- Limited cash flow
- Shorter-term goals
Low Entry Costs
One of the major benefits of investing in a Pooled Mortgage Fund is the low entry costs – usually only around $10,000.
Regular returns on investment
For cash-strapped young people, choosing an investment option that provides regular returns will provide a steady income that can be used for living expenses, saving for a house or for re-investment.
Why should young people consider investing in mortgage funds?
Let’s face it. Most young investors in Australia still have their eye on property.
But with property prices inflated, supply on the market at an all-time low and deposits high, it’s a difficult investment to make at a young age.
Savvy young investors look for alternatives that will get them to their ultimate goal quicker. And that’s where mortgage funds come in.
Types of Mortgage Funds
There are two types of mortgage funds that as an investor you can choose to invest in:
Pooled mortgage funds
A pooled mortgage fund ‘pools’ together investors’ money before lending it out across multiple mortgages. The mortgage manager decides which mortgages the funds are invested in and all investors in the pool share the lending risk.
Direct (or contributory) mortgage funds
A direct mortgage fund or contributory mortgage fund allows you, as an investor, to select the mortgages you invest in. Investors can choose mortgages based on the risk profile, loan purpose, location, term, and interest rate.
Are mortgage funds a good investment?
Mortgage funds have, and continue to be, a popular investment choice for many types of investors. This includes seasoned investors who use them to diversify their portfolio to new investors with minimal amounts to invest.
There are a number of reasons why investors choose mortgage funds over other investment types. And you may find some of these benefits suit your own personal situation.
Fixed, regular income
As in an investor in a mortgage fund, you’ll receive payments. Borrowers “pay off” the loan in much the same way you would pay off a regular mortgage. How much you get depends on your investment amount and the interest rate paid by the borrower.
Attractive rates of return
Because mortgage loans provide borrowers with more flexible terms, quicker access to money and less hassle they often pay higher interest rates. And that translates to attractive rates of return to you.
Mortgage funds are generally managed by an experienced team who understand how to assess a borrowers’ ability to pay back the loan. The team can also conduct extensive due diligence and provide information on the required time and effort to manage the loan and make sure it is paid back on time.
When you are looking for mortgage fund managers, it’s important to make sure that the people managing your investment are knowledgeable and trustworthy. A good way to do this is to check to see if they have testimonials from current investors.
Not all mortgage funds are the same
If you’re considering investing in a mortgage fund, you need to do the research and chat to a professional as there are a number of elements to consider. And the one you choose needs to be suitable to your personal situation and existing commitments.
When comparing mortgage funds, an investor should look at a few key things:
- Loan structure – pooled or contributory
- The type of security being lent on
- The size of the loans
- The loan to value ratio (LVR). More about this below.
- The experience of the management team
Are mortgage funds safe?
Like any investment, mortgage funds have their risks. It’s about knowing the risks, understanding how they may affect your personal situation and doing your homework when choosing which fund to invest in.
Make sure that the fund manager is taking steps to mitigate risk as much as possible. For example:
- Using conservative loan-to-value ratios. If a lender is giving a borrower 90% of the value of the property and property prices drop by 10% then the lender may not be able to recuperate the loan amount if the borrower goes into default and the security property must be sold. Using lower LVRs will provide a buffer in case of property value reductions.
- Paying close attention to the location of the security property. Again, if a borrower goes into default and the security property needs to be sold then a house in a growing city is likely to sell a lot quicker than a property in a declining regional town.
- Balancing first and second mortgages. A second mortgage provides higher returns but is riskier because if the borrower goes into default the first mortgage must be repaid ahead of the second mortgage. If the fund is loaning on second mortgages then it’s a good idea to check that there is a good balance between the number of first mortgages and second mortgages being funded.
Pooled Mortgage Funds v Direct Mortgage Funds
Both types of managed funds have their pros and cons. That’s why it’s important to consider your own specific situation when making the decision which way to go.
Passive investors edge toward Pooled Fund options as the fund manager makes the lending decision and the investor just waits for their regular distributions. Pooled funds usually have lower minimum investment amounts and are open to both Retail and Wholesale investors.
Direct Funds allow an investor to pick and choose which loan they’d like to invest in.
You get to see all of the loan details and make a decision on whether you’d like to fund the loan based on rate of return, security property location, LVR and length of the loan. It is a much more ‘active’ approach to mortgage investing than a Pooled Fund.
As a Direct Fund Investor, you’ll only have one mortgage per investment, instead of being exposed to multiple mortgages with a pooled fund which means it is higher risk.
Regardless of which type of mortgage fund investment you favour, they will both be structured as a managed investment scheme. That means they are set up as a Trust. As an investor you’ll get units in the trust for both pooled or direct mortgage funds.
Do your homework and choose quality
Quality mortgage funds have robust risk management processes. And they’ll likely have a good track record of incurred losses.
The quality of properties the fund invests in can also be an indicator to the quality of the Mortgage Funds. Being able to attract good borrowers is just as important as attracting investors.
And demonstrating they have runs on the board when it comes to diversification of different property types, across multiple locations is a good sign of a successfully managed fund.
Things you need to consider are:
- What are their investment criteria for borrowers?
- What is the rate of return? The higher the return the higher the risk.
- Is the fund highly rated?
- Are they a well-managed mortgage fund with a consistent track record?
Loan to Value Ratio
It’s important to understand A mortgage fund’s loan to value ratio (LVR).
The LVR is the percentage of the loan value against the property value. For example, if the borrower is seeking a $300,000 loan on a property valued at $600,000, the LVR is 50%.
Fund managers should provide limits for LVRs. But it’s your job to research and understand the fund’s lending criteria and LVR so you can make an informed decision about investing.
Getting professional help can ease the burden and help you make an informed decision. And remember, if it sounds too good to be true, it probably is.
Is mortgage fund investment right for you?
Investing in mortgage funds, especially from a young age, makes sense.
Mortgage funds have higher than average returns, low buy-in amounts and are managed by professionals But it’s always a good idea to seek independent financial advice to see if investing in mortgage funds is the right option for you.
If you have any questions, or are interested in investing, get in touch with APG to find out more about opportunities to invest in mortgage funds.
This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.