Mortgage Funds Are Not Property Funds


One of my soap box subjects and pet issues is when GPS is referred to as a property fund.

Unfortunately, mortgage funds have had a chequered history and operators have tried to avoid the stigma when promoting their product. Hopefully, due to the clean-out of operators by the GFC and, yet, further rounds of regulation by ASIC, mortgage lending may now be able to take its rightful place as a credible investment choice.

My issue is not with property funds per se; it’s that they are a different form of investment and are only really linked as the ultimate security for the Investor is property.

In a property fund the Investor makes an informed decision about the strong rental returns and potential for capital appreciation of the asset. In a mortgage fund there is no capital appreciation but the Borrower bears the first loss of the residue loan to value ratio (LVR) amount if the asset is realised at less than the valuation amount.

As a mortgage fund operator I look at all property investments from an LVR perspective, but this can perhaps be rebadged as an investment to valuation ratio (IVR).

Generally speaking, in a first mortgage investment the Investor is the first cab off the rank upon realisation of the secured asset. An Investor can determine the risk by the LVR. The Borrower gets what is left after all creditors have been paid.

If a property fund is not leveraged then at the time of acquisition the IVR would stand at 100%, but is generally greater than that due to purchase costs, Government charges, scheme operators’ fees, and potentially commissions paid to raise funds. There must therefore be an increase in the value of the property before there could be a return of capital. The costs of selling the property also need to be taken into consideration. If there are good and secure rental returns, it is viewed as a long term investment and the belief is that ithe property will increase in value, then an informed investment decision can be made.

When the property fund is leveraged, then interest costs, longevity of the loan facility and the fact that the mortgagee must be paid out in full before there is any return of investor capital become relevant considerations. Leveraging can generally increase returns but they can also increase the risk.

I am not endeavouring to put down property funds. My issue is the perception that owning property is inherently safe and that mortgage funds, due to their history, are inherently risky. They each have their role from a diversity of investment, risk and tax planning perspectives. So, here’s my tip – be sure to make a fully informed investment decision.

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