Mortgage trusts: A viable option for income seekers

Investors are constantly preached to about the virtues of diversification within their portfolio. The old adage of not having your eggs all in the one basket, is certainly a smart approach. It is important though, not to just look at diversification from the point of view of different asset classes. It is equally important to look at how each investment is contributing to your standard of living.

 It may be important for you to balance your portfolio to ensure you have a mix of short and long term investments. Achieving the right portfolio mix will help ensure you have money available to keep living life the way you want.  Perhaps this is why mortgage trusts are re-emerging as an option for individual and SMSF investors seeking income in their investment portfolio. 

The Global Financial Crisis (GFC) resulted in a number of investors moving away from this investment type. However, Trusts that were structured consistently with the liquidity of the underlying mortgage assets and conservative Loan to Value Ratios (LVR) survived the crisis. The key to their success was their conservative loan to valuation ratios.

How mortgage trusts work?

When you buy into a mortgage trust, you are buying 'units' in an investment operated by a Responsible Entity. The trust's money is lent as mortgage loans to borrowers who use the money to buy property, develop properties or refinance existing loans.

Two key considerations when considering an investment in a mortgage trust:

• Trust liquidity

Prior to the GFC, many mortgage trust managers paid redemptions on demand, but mortgages are illiquid assets. Mortgages can have a 12-18 month timeframe from the time of loan settlement until repayment. Since the GFC, some mortgage trust managers have restructured their redemption policies to align more closely with the liquidity of the underlying mortgage assets. One way this is achieved is to require a redemption notice period from investors, therefore giving the manager adequate time to manage trust liquidity.

• LVR

LVR is a lending risk assessment ratio that mortgage trust managers calculate before approving a mortgage. LVR is calculated by dividing the loan amount by the value of the project, which is determined by an independent valuation. Mortgage trusts generally do not lend in excess of 70% LVR. For example, if a project involves the construction of six townhouses with an independent valuation of $3 million ($500,000 per townhouse), the loan advanced will generally not exceed $2.1 million ($350,000 per townhouse). Conservative LVRs help to guard against potential property price downturns.

The risks of mortgage funds vary depending on the borrowers and the purpose of the loans. As with any investment, it must meet your individual needs so seek professional advice before making a decision.

Investment opportunity

Trilogy Funds’ pooled, first mortgage trust, the Trilogy Monthly Income Trust, was established in 2007 and has maintained a unit price of $1 since inception. It has also paid distributions to its investors every month since inception. Over the past 5 years the Trust has achieved an average net rate in excess of 7.5% per annum (Past performance is not a reliable indicator of future performance). Investments in the Trilogy Monthly Income Trust are nto bank deposits and are not government guaranteed.