What is a mortgage trust?
If you’re seeking an income-focused, property-based investment option to add to your portfolio, a mortgage trust may be an option for you.
What is a mortgage trust?
Mortgage trusts, also commonly known as mortgage funds, are an investment vehicle that provides loans to commercial borrowers to finance land subdivision, property development or construction. These loans are generally secured by mortgages over property as the primary security.
Many mortgage trusts may also invest a percentage of investors’ money in cash and other investments which are considered more liquid investments, to manage the Trust’s current and future cashflow requirements.
Mortgage trusts aim to generate a regular and competitive income for investors via loan repayments, interest and fees paid by the borrowers, as well as income from cash and other underlying investments held by the trust.
Types of mortgage trusts
There are two main types of mortgage trusts: pooled mortgage trusts and contributory mortgage trusts.
In pooled mortgage trusts, the trust’s portfolio is made up of a ‘pool’ of various loans. As a result, investors receive distributions based on the overall income of all mortgages within the trust.
In contributory mortgage trusts, investors can decide which specific mortgage(s) to invest in and receive distributions based only on the income derived from those specific loans.
Below are typical characteristics of these two types of mortgage trusts.
Pooled mortgage trust
- Your investment is diversified across a range of mortgages, and other assets.
- Income from the pool of mortgages, plus other trust income, is distributed to all investors based on the number of units they hold in the trust. (Investors in a mortgage trust are issued ‘units’ in the trust based on the amount they invest in the trust.)
- Investors share the risk associated with each of the mortgages in the pool.
- You can withdraw some or all of your capital subject to the trust’s liquidity (a notice period is usually required).
Contributory mortgage trust
- You decide which mortgage you invest in.
- The mortgage you invest in might generate a different return from other mortgages within the fund.
- You’re exposed to the risk of only the mortgage(s) you choose to invest in.
- You can only receive your capital when the relevant loan is repaid. This may be in tranches or in one lump sum.
Potential benefits of a mortgage trust
Pooled and contributory mortgage trusts both have their advantages, however the option that is best for you will depend on your personal portfolio, financial goals and risk tolerance.
Below, we list some potential benefits of investment in these types of funds.
Professional management
When you invest in a professionally managed mortgage trust, an experienced fund manager will source and acquire the mortgage or mortgages, as well as take care of administration and ongoing management of the loan(s) on your behalf – so you won’t have to.
Exposure to the property sector
In the current low interest rate environment, many investors have turned to property to seek more competitive returns. Mortgage trusts provide an alternative way to invest in the property sector without direct property ownership.
Competitive income
Mortgage trusts are designed to pay a competitive income via regular distributions. Contributory mortgage trusts may achieve higher yields by allowing greater discretion over which mortgage you invest in. However, they are exposed to a higher concentration risk as a result.
The level of yield may also vary depending on the performance of the individual trust or specific mortgage.
Portfolio diversification
Mortgage trusts may be a suitable investment option to include as part of a broader, diversified investment portfolio.
Pooled mortgage trusts typically offer a higher level of diversification than contributory trusts, by diversifying the loans in the trust across various borrowers, geographic locations, property sectors (e.g., residential, commercial, industrial), project types, project stages, loan sizes and Loan-to-Valuation Ratios (LVRs).
What to consider when looking to invest in a mortgage trust
It’s important to evaluate key features of any trust before deciding to invest to determine if it is a suitable investment for you.
Below, we discuss four features to consider when looking to invest in a mortgage trust.
Type of loans
The type of loans included in a mortgage trust may significantly affect its risk profile; based on the property sector, current market demand, stage of the property market cycle, and risks associated with the borrower(s).
It’s important you ensure the types of loans included in the trust’s portfolio align with your personal circumstances and investment goals.
Loan-to-Valuation Ratio (LVR)
A Loan-to-Valuation Ratio (LVR) is a term used to quantify the lending risk of a mortgage. The LVR is calculated as a percentage of the loan amount, compared to the appraised value of the asset for which the loan will be used.
Typically, loans with lower LVRs are considered lower risk. This is because the ‘excess’ value of the property above the loan amount provides a buffer that can help protect the lender in the event of a loan default.
Geographic spread
The status of the property market in Australia differs between states, sometimes even regional and different parts of our capital cities. Depending on their position on the property cycle clock, some states may find themselves in a downturn, whilst others a boom.
Mortgage trusts with geographic diversification spread this risk across various property markets, reducing the risk if one market underperforms, and therefore minimising investors’ exposure to any diluted returns.
Liquidity
It’s important to always take your cash-at-call requirements into consideration when planning to invest in a mortgage trust.
As a rule of thumb, most pooled mortgage trusts allow you to withdraw some or all your capital, subject to the trust’s liquidity, after a required notice period. In contributory mortgage trusts, your invested capital must remain in the trust until the relevant loan is repaid.
The withdrawal period may also vary depending on the individual trust.
Investment and portfolio management
An experienced investment manager underpins the success of any investment as the decisions they make impacts the way the trust’s portfolio is managed and the returns it provides to investors.
Traits of a strong fund manager may include:
- Experience: your investment manager should have developed an in-depth understanding of how the market and mortgage trusts work, so they’re well placed to make calculated investment decisions in your best interest
- Discipline: the ability to adhere to their investment mandate, criteria, and representations to investors
- Proactive risk management: the ability to identify risks and proactively manage their impact on returns
- Customer service: proactive communication about the trust and your investment.
We always recommend investors obtain, read and understand the relevant Product Disclosure Statements and seek advice from a licensed financial adviser before investing.
About Trilogy
Trilogy Funds is one of Australia’s leading fund managers and financiers of property-based investments. Click here to find out more.
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As co-founder and Managing Director of Trilogy, Philip is responsible for leading a cohesive and high-performing team across Trilogy’s three offices, overseeing business compliance, and developing product offerings. He sits on the Compliance, Property Investment, Lending and Treasury Committees. He also acts as General Counsel for Trilogy.
Philip has over 30 years of experience in the financial services industry, across financial planning and funds management. He was previously a partner in a Brisbane law firm, having been a solicitor admitted to the Supreme Court of Queensland and High Court of Australia for over 35 years. He is a Fellow of Finsia, with qualifications at a post graduate level in mortgage lending and financial services.
Philip leveraged his Legal and Financial Services qualifications as a founding director in 1998 of the funds management entity which evolved into Trilogy. He is a key instigator of Trilogy’s products, including the Trilogy Monthly Income Trust, as well as the Trilogy Enhanced Income Fund, the Wholesale Income Fund and various property trusts. Philip is passionate about creating financial products within the mortgage and property sectors that generate attractive income returns, as well as assisting younger generations to achieve their financial goals.
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This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the Trilogy Monthly Income Trust ARSN 121 846 722. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 11 April 2022 and by considering the Target Market Determination (TMD) dated 1 October 2021 for the Trilogy Monthly Income Trust ARSN 121 846 722 available at www.trilogyfunds.com.au. The PDS and the TMD contain full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy Funds, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.
Livewire gives readers access to information and educational content provided by financial services professionals and companies (”Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
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As co-founder and Managing Director of Trilogy, Philip is responsible for leading a cohesive and high-performing team across Trilogy’s three offices, overseeing business compliance, and developing product offerings. He sits on the Compliance,...
Expertise
As co-founder and Managing Director of Trilogy, Philip is responsible for leading a cohesive and high-performing team across Trilogy’s three offices, overseeing business compliance, and developing product offerings. He sits on the Compliance,...
Expertise
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