A simple investor guide on mortgage investment funds
Aussie interest rates remain at an all-time low and the Reserve Bank of Australia (RBA) maintains that they won’t be raised until at least 2024. Add to this a housing market that continues to defy the odds and it’s no wonder investors are on the lookout for alternative investment opportunities.
This is why mortgage funds are an attractive option to savvy investors. And the benefits of investing in a mortgage fund go well beyond the dollar and cents value.
So, other than the opportunity to access great returns, what are some of the other benefits to be had when investing in a mortgage fund?
But first…. What’s a mortgage fund?
A mortgage fund, or mortgage scheme or mortgage trust, is a type of investment. Investors put their money into the fund and it’s then lent out to borrowers in the form of a mortgage which is secured by a security property (usually a residential property or land).
The funds are administered by a fund manager with investors receiving regular distributions. The borrowed money is used to buy or develop properties.
There’s two types of mortgage funds
Pooled mortgage funds
Investors’ money is pooled and lent out across several mortgages. The fund manager, not the investors, selects the mortgage portfolio and the lending risk is shared by all investors.
Investors receive regular returns based on the interest paid by the borrowers. Pooled funds allow for a more diversified portfolio as an investor’s money is spread over many loans which also reduces risk should one borrower default on their loan.
A pooled fund tends to have lower minimum investment amounts (sometimes starting at just $10,000) so is suitable for investors at all experience levels.
Direct (or contributory) mortgage funds
Sometimes known as peer-to-peer lending and as the name suggests, a direct mortgage fund or contributory mortgage gives the investor the option to choose which specific mortgage they want to invest in.
Some investment considerations include the purpose of the loan, interest rate, location of the security property, and the term of the loan.
Loan terms are usually around six to twelve months so it’s a really short-term investment. The capital and the interest are paid once the entire loan has been repaid. As the investor has to decide where to invest, this type of mortgage fund suits the more experienced investor who also has more money to invest. Minimum investment amounts usually start at around $100,000.
There are pros and cons to each type of mortgage fund, so please speak to the professionals before jumping in. Now we know all about mortgage funds, what’s in it for you?
Mortgage Fund Benefit 1 – Consistently high returns
Mortgage funds are able to deliver higher returns than many other investment options. This is because borrowers wanting short-term finance are willing to pay higher interest rates which are passed on to the investors in the form of regular distributions.
Most funds will offer returns of 5-10% p.a. The Active Property Group Pooled Mortgage Fund has consistently delivered 9%+ p.a. Returns (based on results up until March 2021).
Mortgage Fund benefit 2 – Regular income
Pooled mortgage funds usually pay distributions on a monthly or quarterly basis so investors can enjoy having a regular stream of income throughout the year.
Mortgage Fund benefit 3 – Passive investment
A mortgage fund has a fund manager and it’s their job to, well, manage the fund. An experienced manager will source borrowers, conduct extensive due diligence to make sure the borrower is sound, and then manage the loan to make sure it is paid back and interest is received.
As an investor, all you need to do is sit back and wait for those dollars to start rolling in. Investing in a mortgage fund is a truly passive investment.
And what does this give you? You mean other than more time to enjoy your life? Or spend time with your family and pursue leisure activities? In fact, your regular income could pay for all these lovely leisure pursuits.
Enjoy that weekend away golfing, or lazing in the sun with the latest bestseller, safe in the knowledge your fund manager has everything under control.
Mortgage Fund benefit 4 – Entry costs are affordable
For as little as $10,000, you can invest in a mortgage fund. Many investors who have money sitting in a bank account earning very little interest are looking for their money to work harder for them.
Whether this is to save for a home deposit, pay for their child’s education, or go towards retirement many investors have realised that leaving their money in the bank is not going to help them achieve their financial goals.
Mortgage Fund benefit 5 – Invest in the property market (without having to buy a property)
A mortgage fund is an excellent way to invest in property without having to actually buy a house, building, unit, or even a block of land. The big banks take care of everyday home buyers and their mortgages.
But what about businesses or property developers who require short-term funding for a business-related purpose (and don’t need a 30-year loan)? The loans are always secured by a property (whether that is a house, apartment, business, or block of land) so should the borrower default it is possible to recuperate the money lent out by selling the security property (if worse comes to worst).
Expert risk management
There are always risks associated with any type of investment. Whether you decide to go the pooled fund or direct fund route your risk will be mitigated by an experienced, professional and capable mortgage fund manager. They do all the running around, all the document gathering, all the paper shuffling.
A great mortgage fund manager will be transparent, honest, and have your best interests at heart. Whether you have a little or a lot to invest in, they’ll guide you to the best investment for your personal situation.
If you have any questions or are interested in investing, get in touch to discover more about opportunities to invest in mortgage funds.