How much do you know about mortgage trusts? Have you considered investing in one yourself?
There are many different vehicles available to build wealth and how you choose to park your investment dollars can be influenced by many different factors, including age, family commitments, income and your own appetite for risk.
Mortgage trusts have grown increasingly popular among investors, with the sector surpassing $10 billion in funds under management, earlier this year.
So, how exactly does a mortgage trust work and what is the appeal for investors?
Mortgage trusts pool investor money for lending to borrowers while subsequently taking a mortgage over the underlying property. This may be lent for land subdivision purposes or to a borrower undertaking construction and property development.
In return for investing, investors receive a regular income called a distribution from the interest paid by borrowers, cash and other underlying investments held by the Trust. Distributions may be paid half yearly, quarterly or monthly depending on the trust.
Types of mortgage trusts
When investing in a mortgage trust, there are two main types of trusts for you to consider, pooled or contributory trusts.
|Your investment is diversified across a range of mortgages.||You decide which mortgage you invest in.|
|Income from the pool of mortgages is distributed to all investors equally.||The mortgage you invest in might generate a different return from other mortgages within the fund.|
|Investors share the risk associated with each of the mortgages in the pool.||You’re exposed to the risk of only that mortgage.|
|You can withdraw some or all of your capital subject to the trust’s liquidity (a notice period is usually required).||You can only receive your capital when the loan is repaid. This may be in tranches or in one lump sum.|
Which is the better option? Both contributory and pooled mortgage trusts have their advantages. Both are designed to pay regular distributions, so both can suit investors seeking income. While a contributory mortgage trust gives investors discretion as to which investment option they want, a pooled mortgage trust has any number of loans at any point in time in the portfolio, each with their own risk profile and loan profile. The pooled mortgage trust structure enables diversity across borrowers.
Potential benefits of investing in a mortgage trust
Mortgage trusts aim to provide investors with competitive investment income and depending on the type of trust, portfolio diversity.
Like all investments, there is risk associated with the potential returns and it is crucial to ensure the investment risk profile of your investment choice suits your personal circumstances. A licensed financial adviser can help you decide if this investment type is appropriate for you.
Trilogy is one of Australia’s leading fund managers of property-based investments. Learn more about investing in Trilogy’s range of mortgage trusts, diversified income funds and property trusts.