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What to look for when considering investment in a mortgage trust


The mortgage trust sector is becoming increasingly popular with Australians seeking competitive investment income while managing the impacts of COVID-19 on their portfolios. This is in large thanks to the underlying strength of the Australian property market.

To help you get to know this style of investment better, its features, and its role in building a diversified portfolio, we've compiled a list of key things to look for when considering investment in a mortgage trust.

Pooled or contributory mortgage trust?

consider mortgage trust

When considering investment in a mortgage trust, you have the option of investing in a pooled or contributory trust. Both types of trusts have their advantages. Both are designed to pay regular distributions, so both can suit investors seeking income.

Learn more about the differences between pooled and contributory trusts.

Types of loans

Generally, a mortgage trust is exposed to the risks related to lending money and the types of underlying assets and projects to which the loans relate.  Importantly, some mortgage trusts lend with respect to properties at various stages of construction and development, or land subdivision projects.

It's important that such projects are managed by experienced developers and that you understand the additional risks of exposure to such activities. The Product Disclosure Statement (PDS) or Information Memorandum (IM) for the mortgage trust will set out the types of loans to be funded. It will also set out details of the fund manager's approach to valuations on the properties. 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 asset as security, the first mortgage has priority over the second mortgage should the borrower default on their repayments.

Loan-to-valuation ratio

Loan-to-valuation ratio (LVR) is the percentage of the loan amount extended to a borrower, at a point in time, compared to the appraised value of the property. A mortgage with a high LVR is generally associated with a higher risk as fluctuations in valuations will impact the recoverability of the debt.

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

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

Before deciding to invest, it's important to read the PDS and any updates on the portfolio to find out more on metrics such as LVR limits. You should also research the average LVR of the loan portfolio to ensure you're comfortable with the associated risks. These figures may be at a point in time, so understanding the minimum and maximum LVR limits is important.

Geographic diversification

No doubt you're aware that the performance of the property market in Australia differs between states, sometimes even regional territories. The markets in Sydney and Melbourne differ significantly to those of Brisbane or Perth and depending on their position in the property cycle, some states may find themselves in a slump whilst others boom.

Furthermore, some states may have micro-markets operating at different ends of the clock. 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 to help insulate investors against any diluted returns.

Fund manager and executive experience

When choosing a fund manager, it's important to do your research. A strong fund manager underpins the success of any investment, in any asset class. The decisions a fund manager makes will impact how your money is used to generate returns.

Traits to look for in a fund manager may include:

Experience: A fund manager's experience in their markets 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 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 fund manager's ability to identify risks and proactively manage their impact on returns provides added security for investors.

Distribution yield

"Distribution yield" is the income paid to investors and is derived from the interest payable on the 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. It's important to consider this payment frequency with respect to your need for investment income. 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 get instant access to your money and withdrawal periods will apply. This is due to funds being lent out to borrowers and the investment 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.

The value of advice

Before making an investment decision, it's always helpful to seek professional advice from a licensed financial adviser. All investments carry risk and an adviser can take a holistic view of your current circumstances and help bridge the gap between where you are now, and where you want to be. This involves the development of a strategic financial plan supported by a diversified portfolio of investments and other financial products which are recommended in your best interests.

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 (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.


Philip Ryan is the managing director of Trilogy and is the fund manager for Trilogy's trusts. A solicitor for more than 30 years, he has experience in commercial and corporate law. Philip is a Fellow of FINSIA and has qualifications in mortgage lending and financial services. His experience in the financial services industry dates back to 1986. Philip was a founding director in 1998 of the funds management entity which evolved into Trilogy.
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