FREQUENTLY ASKED QUESTIONS

What are Mortgage Trusts?

Mortgage trusts allow investors to pool money for lending to individuals and companies to purchase or develop residential or commercial properties.

These loans are secured by mortgages over properties.

The mortgage trust collects the interest paid on these loans and then distributes the interest, less charges, as income to investors.

The trusts are regulated by ASIC.

Types of funds?

Pooled mortgage fund

  • Investors share in all mortgages/investments in the ‘pool’.
  • All investors share the income and spread the risks of all mortgages/investments.

Contributory mortgage fund

  • You or the fund manager specify which mortgages to invest in. These might be for single properties.
  • Your mortgage might pay a different income than other mortgages in the fund.
  • Your risk depends on the quality of the borrower.
  • For most funds, you can only withdraw your money when your mortgage(s) mature.
How to select a mortgage fund

Investors should assess:

  • how much the fund can borrow and how much it has actually borrowed;
  • how much is due to be repaid in the next 12 months;
  • does the fund have the cash flow to repay/refinance the loans;
  • has the fund managed its risks by spreading the money it lends and invests between different loans, borrowers and investments.
  • the fund’s policy for lending money (including how much it will lend to each borrower and rollover terms);
  • the fund’s policy on investing in other mortgage funds; and, if those investments are listed/unlisted and meet required benchmarks.

Investors should also understand how the mortgage fund’s underlying assets are valued and, exactly how much a mortgage fund’s underlying assets are worth.

Why are mortgage fund rates higher than banks rates?

Commercial property mortgage rates are higher than owner-occupied home loans as commercial loans are viewed as riskier borrowers compared with those who are buying a home to live in. However, quality mortgages secured by first and/or second mortgages are rated as low/medium risk. The level of risk is determined by the rate of return. The higher the return, generally, means the higher the risk.

Is liquidity a problem for modern pooled funds?

An investment in a mortgage fund should be considered a medium term investment as the fund is not usually able to terminate a property mortgage on short notice. That said, well-managed funds retain some cash to meet liquidity and orderly redemption requirements. Some funds may only allow redemptions when new investors subscribe for units. Each fund document should detail their policies in this regard.

How secure is a first mortgage or second mortgage?

A first mortgage is a loan obtained for financing the purchase of a property, keeping the property as collateral for the loan. The property acts as security for the lender in case of any default or non-repayment of the loan. In case of default by the borrower, the lender can sell the property in order to recover the amount owed along with the interest.

In case of the first mortgage the lender has the thefirst right to recover full payment before any other lenders on the same property are paid. The first mortgage carries a lower risk for the lenders as compared to other mortgages.

A second mortgage is taken out on a property that is already mortgaged once. While a first mortgage is taken for purchasing property, the second mortgage is usually taken for refinancing purposes or to obtain more money for improvements in the property.

Why doesn't a mortgage fund offer a guaranteed return?

Mortgage funds don’t offer guaranteed returns as past performance is not an indicator of future performance. In addition, income varies as interest rates change meaning that future performance could increase or decrease according to economic circumstances . Mortgage fund earnings are usually higher than from many fixed interest investments over the medium term.

Why are today’s modern mortgage funds different to past mortgage funds?

The Managed Investments Act (MIA) was introduced 1998 to assist in regulating the industry. As a result all mortgage practice were forced to either become licensed under the new regime.

In the wake of COVID-19, the RBA is supporting the sector by providing $15 billion to purchase Asset Backed Securities (ABS)Fees

Generally entry fees are not charged. Exit fees may be payable on withdrawal but are usually not charged after 3 years. Management fees are normally deducted before your return (income) is declared. How fees and costs will affect your investment

https://moneysmart.gov.au/managed-funds-and-etfs/managed-funds-fee-calculator

What is a sophisticated investor?

A sophisticated investor is an investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 millionas prescribed by the Corporations Regulations 2001 (reg 6D.2.03 and reg 7.1.28).

In addition, you can be declared a sophisticated investor outside these parameters if you receive certification from your accountant (see form attached)

How does a mortgage fund determine who it loans money to?

A sophisticated investor is an investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 millionas prescribed by the Corporations Regulations 2001 (reg 6D.2.03 and reg 7.1.28).

In addition, you can be declared a sophisticated investor outside these parameters if you receive certification from your accountant (see form attached)

How big is the mortgage fund industry in Australia?

A sophisticated investor is an investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 millionas prescribed by the Corporations Regulations 2001 (reg 6D.2.03 and reg 7.1.28).

In addition, you can be declared a sophisticated investor outside these parameters if you receive certification from your accountant (see form attached)

Who typically invests in a mortgage fund and why?

A sophisticated investor is an investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 millionas prescribed by the Corporations Regulations 2001 (reg 6D.2.03 and reg 7.1.28).

In addition, you can be declared a sophisticated investor outside these parameters if you receive certification from your accountant (see form attached)