With inflation cooling and interest rates expected to remain steady through 2025, Australian investors are searching for alternatives to term deposits and volatile equities. Mortgage funds—pooled investments that lend money secured by real estate—are stepping into the spotlight. But are they right for your portfolio?
How Mortgage Funds Work
Mortgage funds pool money from investors to provide loans secured by mortgages over real property, typically commercial or residential real estate. Returns are generated from the interest borrowers pay, which is then distributed to investors after fees.
- Structure: Most are managed investment schemes regulated by ASIC.
- Returns: Generally higher than term deposits, but with more risk. In 2025, many leading funds are targeting annual yields between 6% and 8%.
- Liquidity: Some funds allow monthly or quarterly redemptions, while others may lock up your money for a set term.
For example, Trilogy Funds, La Trobe Financial, and Metrics Credit Partners all offer mortgage funds with different risk-return profiles. Investors can choose between funds focused on first mortgages (lower risk) or those including mezzanine debt (higher risk, higher returns).
2025 Policy Changes and Market Trends
This year, ASIC has ramped up its scrutiny of mortgage funds. Following a handful of liquidity issues during the pandemic, managers are now required to provide clearer disclosure around withdrawal rights and underlying asset quality. The Australian Prudential Regulation Authority (APRA) has also tightened standards for non-bank lenders, pushing some borrowers into the mortgage fund sector.
Key 2025 developments:
- Stricter Disclosure: Product Disclosure Statements must now detail the percentage of loans in arrears, average loan-to-value ratios (LVRs), and sector exposure.
- Withdrawal Restrictions: New ASIC guidance restricts open-ended funds from offering daily redemptions if underlying loans cannot be liquidated quickly.
- Property Market Impact: With housing prices stabilising and commercial property under pressure, some funds are shifting focus to residential lending or diversified portfolios.
Risks and Considerations for Investors
Mortgage funds aren’t covered by the government’s deposit guarantee. That means if a borrower defaults or the fund faces a rush of withdrawals, your capital could be at risk.
- Liquidity Risk: Unlike term deposits, you may not be able to access your money immediately.
- Credit Risk: If property values fall or loans default, fund returns and capital can suffer.
- Manager Risk: The expertise and integrity of the fund manager are crucial. Always review track record and transparency.
For instance, in 2024, a major fund temporarily suspended redemptions after a spike in arrears on commercial loans. This prompted a new wave of regulatory focus, and managers are now under pressure to improve risk management and investor communications.
Who Should Consider Mortgage Funds?
Mortgage funds may suit income-focused investors who understand the risks and don’t need immediate liquidity. They’re often used by retirees and self-managed super funds (SMSFs) seeking diversification away from equities and bonds. However, they’re not a substitute for cash or government-guaranteed deposits.
Before investing, check:
- The type of mortgages (first or second ranking)
- Geographic and sector exposure
- Redemption terms and notice periods
- Manager’s historical performance through different property cycles
