How Much Can I Make From Mortgage Investment Funds?
The flip side of historic low interest rates is that there’s not much money to be made from traditional investments like term deposits or bonds. Thanks to the ongoing global pandemic, the stock market continues to heave from one extreme to another.
Investors are understandably shying away from dropping their hard-earned savings into such an unpredictable market. But savvy investors are thinking smarter when it comes to building wealth and diversifying their investment portfolios. Many are looking at mortgage funds as a way to capitalise on a high rate of return that is secured by Australian property.
Whether you’re a first-timer or an experienced investor, you’ll want to understand not only your return on investment but also how risks are managed by your mortgage fund manager.
What’s a mortgage fund?
A mortgage fund is just another way to invest. Investors deposit their money into the fund and it’s loaned to borrowers in the form of a private mortgage.
This is usually done as a short-term investment, anywhere between six and thirty-six months, and is secured by real estate, such as a residential property or a piece of land. A mortgage fund is an excellent way to enjoy passive income and diversify your investments.
What’s the average return on investment (ROI) for mortgage investment funds?
The average ROI for a mortgage fund investment currently sits between 6% and 10% per annum. Active Property Group’s Pooled Mortgage Fund paid a 9.14% p.a. return in the March 2021 quarter.
With low interest rates here until at least 2024 and with the Australian property market continuing its upward trajectory and more housing developments springing up across the nation, investing in a mortgage investment fund could turn out to be the smartest thing you do all year. H2: How does a mortgage fund work?
A mortgage fund works by pooling investors’ money and then lending that money to borrowers and the interest on those loans is paid to the investors. The mortgage fund manager will find borrowers and manage the short-term loans secured by Australian real estate.
They will manage risk for both investors by doing due diligence, coordinating valuations and settlements and taking care of the administrative accounting. Investors are offered Units in the fund or Trust and receive regular distributions based on the interest rates paid by the borrowers and how many Units they have in the fund.
The Active Property Group has an independent trustee who holds all of the assets on behalf of all of our investors, to further mitigate risk.
There are two different types of mortgage funds
Pooled mortgage funds
The fund manager chooses which mortgages to invest in and, as the name implies, investment funds are pooled and loaned out to different borrowers over several mortgages.
In this way, the lending risk is shared by all the investors and allows for a more diversified portfolio. Investors receive regular income over the course of the loan and, as pooled funds generally have lower entry-level investment amounts (currently at just $10,000) they’re ideally suited to smaller or new-to-mortgage-fund investors.
Direct (or contributory) mortgage funds
This type of lending, which starts at around $100,000, allows the investor to choose exactly which mortgage they want to invest in based on the interest rate, location of the security property, type of loan, and the loan-to-value ratio. These loans are for short periods of time (usually six to twelve months) and the investor receives their capital and interest at the end of the loan term.
As the decision-making lies with the investor and there are usually larger sums of money involved, this would suit a more experienced person with more money to spend and who doesn’t rely on the regular income of interest repayments. Before you opt for this type of investment, please consider:
- the purpose of the loan
- the interest rate
- the location of the security property, and;
- the loan term.
Why invest in a mortgage fund?
Banks have extremely strict lending criteria which open up a sea of opportunities for private lenders and borrowers. And as previously mentioned, businesses will pay a premium interest rate for a more flexible lending approach such as a very short-term loan.
The fact that private mortgages are secured by real estate means that, should the borrower be unable to repay the loan, the secured property can be sold to recuperate the loan funds. As an investor, and depending on the type of fund you want to use, you can invest small amounts of money across different mortgages.
What are the risks of mortgage funds and how does Active Property Group manage them?
Any investment comes with risks which is why choosing the right mortgage fund manager is so important. An experienced mortgage fund manager, such as the team at Active Property Group will minimise risk by considering the following:
Conservative LVRs – by only lending up to 75% of the value of the security property means that if a borrower were to default and the security property needed to be sold there is a better chance of recuperating the loan funds than if 90% of the property value was lent.
Diversification – a fund will invest in loans from different locations, using different security types in order to diversify the portfolio.
Security property – the size, type, and location of the security property will alter the loans’ risk profile.
Licenced – APG has an independent Trustee, Primary Securities Ltd, which operates under an Australian Financial Services Licence and oversees everything the company does.
More Information – All the details of the funds, including risks and fees are set out clearly in a Product Disclosure Statement (PDS) or Information Memorandum. If you’ve any questions, or are interested in investing, contact us to learn more about opportunities to invest in mortgage funds.