What are mortgage funds?

Mortgage funds are your answer if you are looking forward to meeting your financial requirements. Mortgage funds are also known as ‘Mortgage Trusts’ or ‘Mortgage schemes’, wherein the money is pooled by various investors and lent out to borrowers for buying or developing properties, or even to invest in other mortgage funds. Mortgage funds are managed by a professional fund manager, who pays the investors a regular income annually or quarterly, in lieu of the invested amount.

There are two types of mortgage funds that borrowers can benefit from, namely-

  1. Pooled Mortgage Funds; and
  2. Contributory Mortgage Funds

A mortgage fund differs from other investments in terms of withdrawal and the rate of interest received. This means that you cannot make withdrawals from your mortgage funds within a short notice period and it does not guarantee any fixed rate of interest on the returns as in case of ‘term deposits’.

Now, let’s see the 5 potential benefits that mortgage funds can give its investors in the long run.

Benefits of Mortgage Funds

Mortgage investments can when selected well, be a form of investment that allows investors to manage the amount of risk they want to accept and in many cases fix the return they will get for that risk.

1. Continuous Cash Flow:

You will realize, with experience, that without a real estate mortgage fund, there will be times when your hard earned money is not being invested as a result of which you are also not earning anything at all. On the contrary, if you possess a real estate mortgage fund, there will be managers, who will help you in keeping such losses from happening. With real estate mortgage funds, the investments keep shuffling, thus providing you and other investors with a persistent and incessant flow of revenue.

2. Professional risk management:

Bankers and brokers certified by the State, manage your real estate mortgage fund for you. When you invest in a real estate mortgage fund you can be worry free about any underwriting work that is involved. Underwriting is taken care of by these professional fund managers, unlike the time when you were looking to finance a project on your own and had to do all the running around. The fund managers ensure that whoever the borrower is, he/she is creditworthy and that his/her property meets the outlined guidelines. Fund managers for real estate mortgage funds take on full responsibility of ensuring whether a property is appraised. They also check for title clearance and accuracy of other financial calculations involved so that you do not have to bear losses.

3. Projected Returns:

Another aspect of making investments in a real estate mortgage fund is that investors can predict the exact time on their investments. This comes as an opportunity to investors especially if they require a steady income flow or if they are planning to make a reinvestment. The reliable and predictable nature of real estate mortgage funds is also an added advantage for those who are in the retirement stage, helping them to plan out life after work.

4. Security:

Other than the security offered by the diversification of plans, along with risk factors handled by professional managers, these funds also enable you to secure all loans via first mortgages. First mortgages are usually secured by direct property like retail, commercial, industrial, and residential. This process is similar to borrowing money from the bank when you plan to buy a home. The only difference is that in case of mortgage funds a unit trust structure is used. Here, the mortgage manager receives the funds from the investors, who are each issued units, and then invests those funds in lieu of a management fee.

The fund manager takes all your responsibilities from applying investments to deciding whether to invest in all or selected property sectors, as well as the borrowing levels for particular assets/borrowers. As an investor, you will benefit numerous assets in different categories in contrast to the small outlay of funds that you might receive from investing in a single property.  Your fund managers are well equipped with the knowledge and expertise pertaining to tasks like the right time to make a foreclosure and locating another investor to take over the property, thus saving you all the time and headache in doing the same.  Having the security of an investment backed by hard assets is more desirable to some investors over more risky investments such as futures, commodities, stocks, and bonds.

5. Meeting Varied investment Goals:

With the wide variety of performance goals across multiple real estate mortgage fund options, it is easy to locate one that matches your goals and risk tolerance. Real estate mortgage funds will aid you with information in making your decision, such as their underwriting criteria, historical performance figures and how much the managers have invested.

Conclusion

Like most investments, there is risk associated with the potential rewards that are linked to mortgage funds, hence making it critical to ensure that the investment risk profile suits your personal circumstances as well. A licensed adviser can help you make this judgment if you find yourself on unfamiliar grounds with this investment type.

Investors should also understand how the underlying assets of mortgage funds are valued along with the accurate valuation of the mortgage security.  Knowing these facts will assist investors in judging the accuracy of these valuations, as well as in understanding their frequency and the people running them.  Like any investment, those considering mortgage funds should educate themselves more about the sector as well as the risks that this domain entails to stay safe and avoid losses. Talk to a financial advisor before you take the big step.



Author: Ruchir Gulati
Experienced finance professional with over 13 years experience, proactively developing strategies for clients to make better decisions about their wealth with tailored solutions.

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