And should I invest in mortgage funds?
A mortgage investment fund is an investment fund that lends money (that has been secured against real estate) to borrowers who might not qualify for traditional bank financing, or who are looking to procure short-term funding faster than what a traditional bank loan can provide. Investors nominate their investment amount and the funds are pooled together to lend out to borrowers in the form of mortgages.
If you’ve ever asked yourself ‘should I invest in mortgage funds?’, here’s everything you need to know.
There can be any number of reasons why you’re thinking about investing in mortgage funds. You’re a savvy investor looking to diversify an existing investment portfolio. You’re a new investor wanting to build a strong investment portfolio. Or like so many others, you’re currently priced out of the Australian property market. Perhaps with interest rates tipped to be on the rise again sometime soon, you want to make smart investment decisions.
Whatever your reasons, wanting to know more about mortgage fund investments and how to invest in a mortgage fund before taking the financial plunge is a great sign. It shows you’re on the ball and care about where you invest your hard-earned dollars.
So let’s start at the very beginning.
What is a mortgage investment fund?
A mortgage investment fund is a type of managed investment fund. Investors nominate their investment amount and, under the guiding hand of an experienced investment fund manager, those funds are pooled with other investors’ funds and loaned out to borrowers as private mortgages. The borrowers pay interest on the loans and that’s how the investors make their money.
There are two types of mortgage investment funds:
Pooled funds – your money, along with the money of other investors, is pooled together into a larger fund and loaned out to a variety of borrowers. This means the investors’ funds are diversified and they receive regular distributions based on the interest paid by the portfolio of borrowers.
Contributory funds – also known as stand-alone funds, select funds or, most commonly, as direct funds. This mortgage fund is designed so the investor can select which particular loan they’d like their funds invested in. The investor works with a private, non-bank lender who offers the mortgage and then receives their capital and interest at the end of the loan term.
What is a mortgage?
Investopedia defines a mortgage in the following way:
‘The term “mortgage” refers to a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan.’
Mortgages, at least in Australia, are typically associated with conventional lending practices and the big four banks. While that’s slowly changing, the truth is the modern investor is shrewd and happy to look past traditional lending models to create both long and short term wealth. The same can be said of borrowers who can’t meet all the out-dated lending requirements still demanded of them and therefore, look to mortgage investment funds to carry their business or projectss forward.
What is a private mortgage and why do borrowers use them?
A private mortgage is a secured loan, the same as any other mortgage. The difference is the money used to fund a private mortgage is sourced from private investors. A private mortgage is sought by borrowers for many reasons including:
- They only need short term finance (as little as 6 months)
- an inability to secure financing from traditional lenders – it may be a new business without the required paperwork
- they can’t wait the usual 6-8 weeks it takes other lenders to approve the loan
- requirements aren’t quite as rigorous as traditional lenders
- settlement happens quickly
- they don’t need the loan for the standard 15-30 years.
Why invest in a mortgage fund?
As an investor, you can use your mortgage fund to diversify a new or existing investment portfolio, while at the same time, securing a passive income. And mortgage funds are a truly passive income stream and can offer strong and consistent returns on the initial investment
Some of the benefits of investing in a mortgage fund include:
- true passive income with regular distributions.
- attractive investment yields (currently between 6-9% p.a.)
- investment is secured by real estate
- minimum investment amounts starting at as little as $10,000.
Are mortgage investments safe?
It goes without saying that any investment carries a certain amount of risk. It’s unavoidable. However, the risks presented when investing in a mortgage investment fund are mitigated in the following ways.
Loan to Value Ratio (LVR)
Usually, private lenders will use conservative Loan-to-Value Ratios (LVRs). The LVR is calculated as a percentage of the loan amount against the value of the property being offered as security. A conservative LVR means that if for any reason the borrower can’t repay their loan, the security property can be sold in order to recoup an investor’s funds and any interest owing.
These funds are also managed by experienced fund managers who do all the groundwork such as finding the borrowers, conducting due diligence and making sure the loan is paid back on time.
What to consider before investing in a mortgage fund
Consider your investment goals
Are you happy to invest for a shorter period of time or do you want a ‘set and forget’ investment just ticking away quietly in the background until retirement? A pooled mortgage fund is a type of passive investment – once you make your initial investment you just sit back and wait for your regular distribution. A direct mortgage is a more active style of investing. You need to do your own due diligence before selecting which loans to invest in.
The general investment rule of thumb is don’t put all your eggs in one basket. The beauty of a pooled mortgage fund is that your funds are used across a portfolio of loans (usually 20-30) so you are instantly diversified.
How do mortgage investors make money?
Mortgage funds give investors the chance to create real passive income through regular interest payments made by the borrower. And with rates currently sitting between 6 and 9 percent, there’s some very nice money to be made.
How do I get started?
This is where we’d suggest you book a call and chat with us about how to get started with investing in mortgage funds.
With minimum investment amounts starting at only $10,000, no minimum investment term, and attractive returns, it’s easy to see why mortgage funds are popular with both experienced and new investors.
If you’re interested in learning more about investing in APG’s pooled mortgage fund, please contact [email protected]