Higher risk yields higher returns with mortgage trusts

Record low interest rates are good news for mortgage holders, but offer less returns to investors. If you’re prepared to step up the risk profile, it could be a good time to combine the two ideas by investing in mortgage trusts to gain access to higher returns on your investment.

What is a mortgage trust?

A mortgage trust, as its name suggests, are where funds are lent to borrowers to invest in residential and commercial mortgages. There are two main types of trusts which are operated by professional fund managers, such as Trilogy.

The first are pooled funds, where your funds are grouped together with other investors. This means that investments are diversified and that each investor takes their share of the distributions, as well as the associated risk.

The other main type of mortgage trust is contributory, also known as peer to peer. While you have a say over where your investment will lie, and consequently, your expected distribution, you’re also only exposed to the higher risk of that particular mortgage, and not the total fund.

Another difference between the two types of funds is how easily you can access your capital. With pooled mortgage trusts you can give notice to withdraw capital, dependent on the trust’s liquidity. Alternatively, capital is generally repaid at the end of the loan with contributory mortgage trusts. Because of this, mortgage trust investments should be considered as a longer-term investment and as part of a balanced investment portfolio.

You can you read about mortgage trust options in more depth.

Another significant year of expansion

In a recent industry research paper by property advisory and forecasting researching house, SQM Research, it was found that overall, the Australian domestic mortgage trust sector was impressive. They also highlighted the Trilogy Monthly Income Trust in the top four best performing for the previous two years.

The report also found that the sector has experienced another year of significant growth, taking the sector to over $10 billion dollars.

The factors which affect funds

The report found that although Western Australia recorded the highest arrears rates, overall arrears rate remained at low levels. This means that the risk of defaulting on loans remained relatively low. The total level of bad debt and non-performing assets was less than 2% over 2018-2019, but it was also noted that arrears were higher on funds which centred around construction.

Another risk associated with mortgage funds is centred on their diversity. Ideally, a fund should diversify to spread risk as much as possible, and not invest in too many mortgages in the one area, the same type of property or the same type of borrower.

As well as offering good returns in most cases, the mortgage trust sector has experienced significant growth because of the current lower rate environment and tightening of lending policies from the major banks.

What return on my investment can I expect?

While the cash rate stands at the historic low rate of 1%, mortgage trusts are returning a significantly higher rate. Over the previous five years, the Trilogy Monthly Income Trust has returned an average of 7.85% per annum and for the month of June paid investors a distribution of 7.50% per annum*.

As with any financial product, mortgage trusts come with a certain level of risk and therefore we recommend seeking the advice of a licensed financial adviser before making an investment decision.

To learn more about mortgage trusts and investing with Trilogy head to trilogyfunds.com.au/investing

*Previous month’s distribution rate is for the month ending 30 June and as equivalent to 7.50% per annum. Past performance is not a reliable indicator of future performance. This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity for the managed investment schemes mentioned in this article. Trilogy has issued a Product Disclosure Statement (PDS) for each of the managed investment schemes mentioned within this article. The PDSs are available at www.trilogyfunds.com.au or by contacting us. You should obtain a copy of the relevant PDS, 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. Applications will only be accepted on the current application form that accompanies the PDS. These managed investment schemes are not bank deposits and Trilogy does not guarantee their performance.

The information on this website contains general information and does not take into account your personal objectives, financial situation or needs. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice.