Consider this situation: you’ve had a sudden windfall. Perhaps you’ve been given a large annual bonus from your employer, received a sizeable tax refund or inherited a tidy sum from a distant family member. After taking a deep breath and considering your financial position, you’ve decided the time is right to get that money working towards a secure financial future.
After researching your options and meeting with a licensed Financial Adviser, you’ve concluded that an investment in a well-managed mortgage trust could be an option, but do you choose a contributory or pooled mortgage product? If you’re not sure, you’re not alone. A financial adviser can provide further details, but here is an overview to help you navigate the terminology.
Contributory mortgage trusts
A contributory trust remains open until investors have put in enough capital to fund a loan and take mortgage security over a single asset. This asset could take the shape of a small commercial or retail property or part of an industrial estate.
To be part of a contributory mortgage trust you generally need to make a greater capital commitment than a pooled mortgage trust and the investment term varies according to each mortgage.
Once you’ve invested in a contributory mortgage product, you’ll generally receive monthly distributions of income, but you’re unable to withdraw your investment until the mortgage loan is repaid, typically between six months and two years, depending on the terms of the loan.
Our Managing Director, Philip Ryan, says on the topic of contributory mortgages, while they may require more capital up front they also provide investors with more control over the decision-making process when it comes to selecting their loan of choice.
“The main benefit of a contributory trust is that it gives the investor greater control over their investment choice,”
“An investor can assess individual mortgage investments against their own profile for risk and weigh up whether the yield and term of investment best suits their needs.”
For investors requiring liquidity in their investment portfolio or those who would like a greater spread of risk, a contributory mortgage trust probably would not be the right fit. However, in all cases it’s best to chat to an experienced Financial Adviser and ensure you read and understand your commitments and the risks you’re exposed to as listed in the Product Disclosure Statement and Supplementary Product Disclosure Statement of the loan you are considering before making an investment decision.
Pooled mortgage funds
Unlike contributory trusts, pooled mortgage loan trusts link investor capital and returns to a group, or “pool”, of loans. A pooled fund spreads risk across numerous loans, rather than being wholly dependent on the performance of a specific loan. Essentially an investor’s portfolio gains a spread of many loan investments thus spreading their risk without the administrative burden of going it alone across several different loans.
Pooled mortgage trusts are likely to have a smaller minimum investment amount, which means that opportunities are accessible to more investors. Furthermore, whether you are a novice or seasoned investor, the decisions for pooled mortgage trusts remain in the hands of the fund manager who should be an expert in that field so you should ensure you’ve done your research into their knowledge and experience, which can be crucial.
The more liquid nature of pooled mortgages is an appealing feature. You can generally make a withdrawal soon after serving an initial holding period.
“This is a welcome feature that can help investors avoid potential cash flow problems in the future,”
“A pooled mortgage trust can bring the flexibility and returns not necessarily synonymous with long-term, more restrictive asset classes.” – Philip Ryan.
Which is the better option?
Both contributory and pooled mortgage trusts have their advantages. Both are designed to pay monthly income distributions, so both look like a good option for investors seeking to boost their monthly income. While a contributory mortgage trust gives investors some control of the asset choice, a pooled mortgage trust leaves the choice to the fund manager, spreads the risk of each loan across a portfolio and provides some liquidity.
Before you commit to investing in a pooled or contributory trust, consider your own financial position, your objectives and broader investment strategy. Do your research, and consult your Financial Adviser so you can be assured that your investment is going to meet your financial needs at your desired risk level.
Looking to learn more about the specifics of a pooled or contributory mortgage trust? Explore some of Trilogy’s investment opportunities and past offerings.
This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity and issuer of units for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722. Trilogy has issued a Product Disclosure Statement for the Trust which is available at www.trilogyfunds.com.au or by contacting us. Applications will only be accepted on the current application form that accompanies the PDS. You should obtain a copy, understand the risks, and seek personal advice from a licensed Financial Adviser before investing. Investment in the Trust is subject to terms and conditions, and risks which are disclosed in the PDS. These risks include the risk of losing income or principal invested. The Trust is not a bank deposit and Trilogy does not guarantee its performance. Trilogy provides only general financial product advice on its own products and does not consider your objectives.