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Mortgage Trusts, an alternative first step for property investors

By By Philip Ryan, Managing Director, Trilogy

Promoted by Trilogy Funds.

 

If you’re looking for a way to get your foot in the door as an investor in the Australian property market; but, you’re not ready to purchase, an unlisted mortgage trust may be an option for you.

A mortgage trust is an investment vehicle that lends investor money to borrowers in exchange for a registered first mortgage over improved or unimproved property as the primary security. In return for their investment, investors receive a regular income called a ‘distribution’ which is generally derived from the interest paid by borrowers.

themselves in a slump whilst others a boom. A mortgage trust with an appropriate level of geographic diversification spreads this risk across various property markets reducing the risk of one market not performing and therefore insulating investors against any diluted returns.

To help you get to know more about this style of investment, we’ve compiled a list of key things for you to consider when considering an investment in a mortgage trust.

 

Pooled or contributory

There are two types of mortgages trusts; pooled and contributory.

In a pooled mortgage trust, your money is pooled with that of other investors to invest in a portfolio or pool of loans.  You do not hold an ownership right in respect of any particular loan, just a right to the number of units that you subscribe for. Together with the other investors, you share in the income generated by the entire pool of loans proportionately to the number of units you hold. The risks associated with the individual loans are diversified across the portfolio. You’re able to redeem your investment subject to the terms and conditions outlined in the product disclosure statement.

In a contributory mortgage trust, you, or the fund manager, decide which mortgage loan to invest in after reviewing the specific features, benefits, and risks associated with that loan. Your money is then pooled with other investors to lend to the borrower.  You receive a distribution return that reflects the nature of the loan that you have selected. The mortgage loan you invest in may generate a return different from others in the mortgage trust and it’s important to note that this style of mortgage trust carries a higher risk because your investment is concentrated in one mortgage loan.

 

Types of loans

Generally, a mortgage trust is exposed to the risks related to lending money and the types of underlying assets to which the loan relates.  Importantly, some mortgage trusts lend money in respect of development activities, with security interests over properties at various stages of property construction and development, or land subdivision projects.  These may include residential, industrial, retail and commercial property which vary in their stage in the property market cycle.

It is important that such projects are managed by experienced developers and that you understand the additional risks of exposure to such activities. The PDS for the mortgage trust will set out the types of loans to be funded. It will set out details of the fund manager’s approach to valuations on the security properties (see further below). It will also state the manager’s policy on seeking first or second mortgages. Whilst a first and second mortgage may use the same property as security, the first mortgage has priority over the security should the borrower default on their repayments.

 

Loan-to-Valuation Ratio

Loan-to-Valuation Ratio (LVR) is a term used to describe a lending risk assessment examined before providing approval for a mortgage. The LVR is calculated as a percentage of the loan amount compared to the appraised value of the property. A mortgage with a high LVR is associated with a higher risk.

An LVR can be calculated two ways. For development and construction loans, the LVR represents the maximum loan amount as a percentage of the “as if complete” valuation. The LVR for completed properties represents the maximum loan amount as a percentage of the “as is” valuation of the security property.

A mortgage trust will generally have specific criteria providing strict limits for LVRs to assist with risk management in the portfolio. Understanding these criteria and the current weighted LVR of the entire mortgage loan portfolio should help you make an informed decision about your investment.

Before deciding to invest, it’s important to read the PDS and any updates on the portfolio to find out the LVR limits. You should also research the average LVR of the mortgage loan portfolio to ensure you’re comfortable with the associated risks.

 

Geographic diversification

As a property investor, no doubt you’re aware that the status of the property market in Australia differs between states, sometimes even regional territories. The markets in Sydney and Melbourne differ significantly to that of Brisbane or PerthPerth, TAS Perth, WA and depending on their position on the property clock, some states may find

 

Investment manager and executive experience

A strong investment manager underpins the success of any investment, in any class. The decisions an investment manager makes impact how your money is used to generate returns. Traits you may look for in an investment manager may include:

  • Experience: an investment manager’s experience in their market means they should have developed an in-depth understanding of how it works, so they’re well placed to make calculated investment decisions in the best interests of their investors.
  • Discipline: an investment manager’s ability to adhere to their investment mandate, criteria, and representations to investors means that investors benefit from transparency and strong emotional control when making investment decisions.
  • Risk management: there are inherent risks with any investment. The investment manager’s ability to identify risks and effectively manage their impact on returns provides added security for investors.
  • Staff retention: low staff turnover means that there is more time spent on managing investment than recruitment and team training.

 

Distribution yield

“Distribution yield” is the income paid to you and is derived from the interest payable on the mortgage loans made by the mortgage trust. The distribution yield is generally expressed as an annualised percentage and paid either monthly, quarterly, half-yearly, or annually. Many trusts offer two options for payment of distributions. You may either nominate to have distributions paid to your financial institution account or reinvested into the mortgage trust so you are able to harness the benefits similar to those of compound interest.

 

Redemption terms and conditions

A mortgage trust is generally an illiquid investment, meaning that, unlike a cash-style investment, you’re unable to redeem your investment and get instant access to your money. This is due to funds being lent out to borrowers and the fund manager’s processes for managing liquidity and protecting the integrity of returns paid to investors. It’s important to understand the redemption terms and conditions outlined within the mortgage trust’s PDS and consider, with professional financial advice, your budget and need for access to your money before making an investment decision.

If you’re considering an investment in a mortgage trust and you’d like to find out more, speak to Trilogy, an experienced fund manager with a high performing pooled mortgage trust offering. Call 1800 230 099 or email [email protected]. A friendly investor relations team member will be able to assist with any questions you may have.

 

This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 and provides general advice only that does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.

 

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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