Mortgage funds are a type of investment product that focuses on mortgage-backed securities. Different investors pool their money together which is then lent out to borrowers who are looking to purchase residential or commercial properties.
Borrowers from mortgage funds typically pay higher interest rates than they would with traditional lenders. Investors make a return in the form of regular income (called a distribution) derived from the interest and fees of the mortgage loan.
Mortgage funds can allow investors to diversify their investment portfolio and gain exposure to the real estate market without having to purchase property directly.
How do Mortgage Funds work?
A mortgage secures a loan for a specified property that the borrower agrees to pay back in instalments. If the borrower defaults, the property can be sold to recover the costs of the loan. Investors make money through the fees and interest.
Mortgage funds are typically managed by professional fund managers who use their expertise to find the best mortgage opportunities, including a mix of residential and commercial loans.
In Australia, there are two main types of mortgage investments: pooled mortgage funds and contributory mortgage funds. These managed investment schemes are regulated by ASIC and must comply with the Australian Financial Services Licence (AFSL) requirements. This includes having a Compliance Plan that details how the fund protects both investors and borrowers from unregistered activities.
ASCF only operates pooled mortgage funds with each fund having its own compliance plan registered with ASIC. Please click here to view a copy of our Australian Financial Services Licence.
Pooled Mortgage Fund
This type of fund pools together money from different investors which is then spread across multiple mortgage loans. An experienced investment manager is responsible for selecting the individual loans as well as managing the day-to-day operations. Investors receive the average interest from all the loans, less any management fees, but they have no control over which mortgages the fund invests in.
Pooled mortgage funds typically have a smaller minimum investment amount which makes them more accessible to a wide range of investors. Your investment is shared across a collection of mortgages and not linked to a specific loan which helps to minimise the lending risk. The more liquid nature of pooled funds also means you can generally make a withdrawal soon after the initial holding period. ASCF only operates pooled mortgage funds.
Contributory Mortgage Fund
Unlike pooled funds that invest in a portfolio of loans, contributory mortgage funds focus on the performance of a specific mortgage. Investors choose which mortgages they want to invest in after reviewing the specific features and risks associated with that loan, such as purpose, location, term, and interest rate. The fund manager’s role is to vet and scrutinise investments.
A contributory fund remains open until investors have put in enough money to fund a mortgage loan. Investors generally need to make a greater minimum investment than with a pooled fund. Contributory funds can offer higher returns depending on the specific terms of the loan, but you are unable to withdraw your investment until the loan is repaid. Your risk also depends on the quality of the borrower.
ASCF does not operate contributory mortgage funds.
What are the benefits of Mortgage Funds?
Although mortgage funds can vary considerably in terms of their underlying assets, they are an attractive investment opportunity for those who aren’t comfortable with investing in the stock market or conventional equity funds. Mortgage fund investments are secured by real estate, meaning that there is a physical asset which can be used to repay the loan even if the borrower defaults.
Mortgage funds are managed investments so investors don’t need to take an active role. The fund manager will use their expertise to manage everything on your behalf. This can be especially helpful when you do not have the time or resources to look after your own investments. Mortgage funds also allow you to invest in the property market without having to take on the full responsibility of ownership.
Mortgage funds are a great way for investors to diversify their portfolios as they can own shares in a range of different residential and commercial mortgages. When you invest in a pooled mortgage fund, you are not just investing in one property. This can help to reduce risk because if one borrower defaults, other borrowers in the portfolio may continue to make payments which means you will still be earning a return.
Mortgage funds also have the potential to generate higher returns than other investments, such as bonds or stocks. This is because the interest rate on a private mortgage loan is typically higher than the interest rate on a bond. The value of properties also tends to increase over time, which can provide gains for investors.
How to invest in Mortgage Funds?
Once you have set out your financial goals, how long you plan to invest, and what risks you’re comfortable with, investing with Australian Secure Capital Fund is easy. We operate three different managed, pooled mortgage funds, each with its own unique balance of risk and return so you can choose the fund that best suits you.
Our mortgage investments have a targeted distribution rate of between 6.10%* and 7.75%* per annum, payable monthly, depending on your choice of fund and investment term. To get started, you can apply online or download and complete the New Investor Application Form.