Imagine tapping into the lucrative world of real estate investing without ever owning a property yourself. Mortgage Funds offer this unique opportunity for Investors looking to earn income-focused, high-returns secured by Australian real estate.
As you learn more about investing in a Mortgage Fund, you will find two distinct types of Mortgage funds will come up in conversation:
- Contributory Mortgage Funds
- Pooled Mortgage Funds
Each of these Funds offer opportunities for Investors to invest in the Australian property market without buying property, but they differ significantly in their structure, risk profile, and potential returns.
But with different structures, risks, and rewards, how do you decide which fund is right for you?
Whether you're looking to take control with targeted investments or prefer the safety of a diversified portfolio, understanding the differences between a Contributory First Mortgage Fund and a Pooled First Mortgage Fund is key to making an informed decision that can take your investment strategy to the next level.
This article looks at the intricacies of both types of funds, highlighting advantages, disadvantages and the factors to consider when choosing between them.
What is a First Mortgage Investment?
Before we delve into the differences between a Contributory First Mortgage Fund and a Pooled First Mortgage Fund, it's important to understand some of the terms you will read in this article.
- A Mortgage Loan is a loan specifically used to purchase, refinance or release equity in real estate, where the property itself serves as collateral for the loan. The borrower agrees to repay the loan, typically via monthly payments, within a set period. If the borrower fails to repay, the lender has the right to take possession of the property.
- A Mortgage Fund is a managed investment structure where Investors provide capital that the fund uses to finance loans to Borrowers, typically for real estate projects or business purposes. The fund manages these loans, oversees the invested capital and distributes income to Investors. This structure enables Investors to participate in the returns generated from real estate lending while the fund handles all aspects of the loan and investment management.
- A 'First' Mortgage Fund is simply a type of Mortgage Fund that will only invest capital into mortgage loans that are secured by first-ranking, registered mortgages over Australian real estate.
- A First Mortgage Investment is a type of investment managed by a Mortgage Fund where an Investor lends their money to a Borrower seeking to finance a short-term commercial loan. This commercial loan is called a “Mortgage Loan”. The mortgage loan may be to build townhouses, a child care centre, a land subdivision or even an office block. The Investor lends their capital to the Mortgage Fund to gain access to stable, secured capital from the income distributed by the Mortgage Fund. The income, generally, comes from the interest and management fees the Fund charges the Borrower on the mortgage loan. The mortgage loan, and subsequent investment, are all managed by the First Mortgage Fund and income is distributed to Investors on set terms.
Remember, the key is that the mortgage loan is secured by a “First Mortgage”.
In the event of a Borrower not fulfilling their Loan, the “First” Mortgage Fund has the “first” claim on the property used as security for the mortgage loan. This security feature makes First Mortgage Fund an attractive option for conservative Investors seeking a stable balance between risk and return.
DID YOU KNOW: A First Mortgage Investment is recognised as one of the more conservative yet high-value investment opportunities available to Investors because they are secured by an asset tied to the Australian real estate market which, historically, has shown resilience and strong growth.
1. Contributory First Mortgage Funds
Structure and Operation
Contributory First Mortgage Funds are structured so that an investor's capital is directly tied to a specific mortgage loan. When an Investor contributes to a Contributory Fund, they are essentially purchasing a share of a particular mortgage loan, in proportion to the amount they invested.
For example, if an investor contributes $100,000 to a Contributory Fund that’s raising $1 million to fund a real estate project, the Investor owns 10% of that mortgage loan or 100,000 units. The performance of the Investors investment is directly tied to the performance of that particular mortgage loan or investment opportunity.
Advantages of Contributory First Mortgage Funds
- Transparency: One of the key advantages of Contributory First Mortgage Funds is the level of transparency they offer. Investors know exactly where their funds are invested at all times allowing them to assess the risks associated with that specific investment.
- Control: Investors in Contributory Funds have 100% control over their investments. Since they can choose which specific mortgage loans to participate in, they can tailor their investment portfolio to their risk tolerance and investment goals. For example, you can select the loan type, amount, return, term, location and LVR you are comfortable with.
- Targeted Returns: With a Contributory fund, your potential returns may be greater due to the nature of the investment. As you are attached to a single mortgage loan you can have a greater return on that single investment depending on your risk appetite. This targeted approach is particularly appealing to Investors who prefer a conservative investment but can still manage their level of risk.
Disadvantages of Contributory First Mortgage Funds
As with all investments, there are always disadvantages and this may include risk concentration. With that said, an Investor can still manage how much they want to lend on each mortgage loan so they are still able to control the risk across multiple investments and, depending on the terms, there are still ways to exit an investment.
For more information, speak to our Investment Team about investment opportunities and your risk appetite to learn more about how you can benefit from our First Mortgage Investment opportunities.
2. Pooled First Mortgage Funds
Structure and Operation
Pooled First Mortgage Funds, on the other hand, operate as a different model. In these funds, Investor capital is pooled together to fund multiple mortgage loans at once. Instead of being tied to a specific mortgage loan, Investors own a share of the fund, which is diversified across a portfolio of loans.
The fund's managers are responsible for selecting and managing the loans within the portfolio. Investors receive returns based on the overall performance of the fund.
Advantages of Pooled First Mortgage Funds
An advantage of a Pooled Fund might be diversification if you prefer a hands-off investment. Since the fund is invested in a variety of loans, the risk is spread across multiple projects.
This type of diversification reduces the impact of any single loan underperforming on the overall fund. With that said, Investors do not have any insight into what the fund invests in so as an Investor you must be confident that the Fund has a lengthy track record of successful private lending to manage your capital.
Disadvantages of Pooled First Mortgage Funds
- Less Control: Investors in Pooled First Mortgage Funds have less control over where their money is invested. Investors cannot choose specific loans, and the performance of their investment is dependent on the decisions made by the fund's management team.
- Lower Transparency: In comparison to Contributory Funds, Pooled First Mortgage Funds offer less transparency. Investors do not know the specific details of each loan within the fund, making it more difficult to assess the associated risks or do your own due dilligence.
Factors to Consider When Choosing Between a Contributory Fund and a Pooled Fund
When deciding between investing in a Contributory Mortgage Fund or a Pooled Mortgage Fund, Investors should consider several key factors:
- Control: Investors with a desire for more control may prefer Contributory First Mortgage Funds where they can choose specific mortgage loans or investment opportunities to invest in. A Contributory Fund also allows an Investor to do their own due diligence in addition to the extensive due diligence and assessment performed by the Investment Team and Panel Valuers on each specific mortgage loan.
- Investment Horizon: How long do you want to be committed to a specific investment opportunity? Would you prefer 6 months, 12 months or 18 months? At CCG we currently offer our Investors opportunities to invest in mortgage loans with 6 to 24 month terms so that we can stay on top of the Australian financial landscape.
- Expected Returns: If expected returns is a subject that matters to you, you might ask yourself if you are seeking higher returns as well as how often you want to receive your income payments. At CCG we currrently offer monthly income of 9 - 11% p.a. target investor return.
- Fees and Costs: It's important to consider the fees associated with each type of fund. At CCG, we have no hidden fees for either Borrowers or Investors, ensuring that the entire process is transparent from the outset, until the end of your investment.
In conclusion...
Both Contributory First Mortgage Funds and Pooled First Mortgage Funds offer unique opportunities for Investors to participate in investing in a stable asset that is secured by Australian real estate.
The choice between the two types of funds depends on your individual preferences, risk tolerance and your unique investment goals.
Contributory First Mortgage Funds provide transparency and control, allowing investors to handpick their investments and know where their funds are at all times plus the option of undertaking your own due diligence in addition to that conducted by the fund. Pooled First Mortgage Funds, on the other hand, offer diversification across multiple mortgage loans but you won’t know at all times where your money is being used.
About Credit Connect Group
Credit Connect Group (CCG) utilise insights developed over 25+ years of private lending and tailor all investments to match our individual Investor’s unique investment goals. Our highly valued network of Investors know at all times where their funds are invested and have the extra security of being able to conduct their own due diligence on each loan they are investing in, in addition to our own internal rigorous assessment and valuation process completed by our professional panel of valuers and assessors.
To find out more about investing in First Mortgage Investments you can speak to our Investment Team on 1300 795 507 or email us at [email protected].