As a retiree your financial goals and investment strategy are unique, and may vary significantly from other age groups. At this stage of life, income generation and low maintenance are two features that are often considered paramount when seeking an investment option. 

If you’re seeking an income-focused property investment to add to your portfolio, but don’t want the responsibility of direct ownership, an Australian-based mortgage trust may be an option for you. 

Mortgage trusts aim to provide investors with a low-maintenance investment alternative that provides competitive income and, depending on the type of trust, portfolio diversity. Read on as we discuss key features of mortgage trusts and factors to understand when considering investment in a mortgage trust. 

What is a mortgage trust?

Mortgage trusts are designed to generate income for investors, derived from borrowers’ repayments, interest, fees and income from loans secured by mortgages over property as the primary security. These loans may be used for land subdivision projects or by a borrower undertaking construction of a property development. 

Distributions (net of fees) may be paid monthly, quarterly, or annually, depending on the trust, and some trusts offer two options for payment of distributions – cash payments or reinvestment of the distributions. 

Types of mortgage trusts

When investing in a mortgage trust, there are two main types of mortgage trusts to consider: pooled and contributory trusts. 

In pooled mortgage trusts, investor funds are ‘pooled’ together and used to provide loans to borrowers to finance property development projects. 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) within the trust 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.

Which type of mortgage trust is better suited for you?

Pooled and contributory mortgage trusts both their advantages. The option that is best for you will depend on your personal portfolio, financial goals and risk tolerance. Below, we list some key considerations when choosing which mortgage trust may be more suitable for you. 

Professional management

Pooled and contributory mortgage trusts are both managed by a professional fund manager, who will source, acquire and manage the investment – so you don’t have to. 

Income

For investors seeking income, both mortgage trust options are designed to pay regular distributions. The level of yield, however, will vary depending on the performance of the individual trust or specific mortgage.

Yield versus diversification

By allowing greater discretion over which mortgage you invest in, contributory mortgage trusts may achieve higher yield, but are also exposed to concentration risk. Alternatively, pooled mortgage trusts enable diversification across borrowers and property type as they have a larger number of loans in the portfolio, each with their own risk profile. For example, a pooled mortgage fund may have loans across various geographic locations, property sectors (e.g. residential, commercial, industrial), and/or loan sizes. 

Liquidity

In pooled mortgage trusts you can withdraw some or all your capital subject to the trust’s liquidity after a required notice period. In contributory mortgage trusts, you can only receive your capital when the loan is repaid. It’s important you always take your cash-at-call requirements into consideration when planning to invest in a mortgage trust.  

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 responsible investment. 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. To reduce risk, some mortgage trusts diversify the loans in the trust over properties at various stages of property construction and development, or land subdivision projects. 

• Loan-to-Valuation Ratio

The Loan-to-Valuation Ratio of the mortgage(s), which is used to describe the lending risk assessment, is calculated as a percentage of the loan amount, compared to the appraised value of the property. 

Mortgages with lower LVRs are generally considered lower risk to the lender. This is because the ‘excess’ value of the property over and above the loan amount provides a buffer that can help protect the lender in the event of a loan default, which could potentially result in a forced sale of the property for a lower price than expected, as well as additional interest and other fees and costs. 

• 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 spreads this risk across various property markets reducing the risk of one market not performing and therefore minimising investors’ exposure to any diluted returns.

• Investment & 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 ultimately, 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.

Learn more about investing in Trilogy's range of mortgage trusts, diversified income funds and property trusts.

This article has been prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy’s products are only available through the relevant PDS issued by Trilogy and available at www.trilogyfunds.com.au. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Investments with Trilogy are not bank deposits and are not government guaranteed.