Just like how property assets can take several forms including retail, commercial, or industrial, there are also different ways to invest in them. Putting your money in mortgage funds is one way to profit from loan interests similar to how banks do.

There are basically two types of mortgage funds that exist in Australia: contributory and pooled. If you’re wondering about the difference between them, here’s a guide to help you.

Contributory Mortgage Fund

A contributory mortgage fund pools money from investors to lend it to borrowers declined by traditional lenders. The funds are managed by a company on behalf of the investors and are used to invest in specific mortgages.

Pros

• Higher returns

Since there are fewer investors taking part in a contributory mortgage fund, the returns are generally higher compared to a pooled fund. You can expect to get around 5% to 7% returns per annum even on conservatively rated loans.

• Regular income source

As the mortgage is paid by the borrower, you’ll receive portions of the profit according to the size of your investment. So long as the borrower doesn’t default, you can depend on monthly returns from the contributory mortgage fund.

• Better control

Bigger capital requirements also come with better control in selecting the loan you can invest in. You can assess the info on each mortgage investment and choose one that fits your risk profile.

Cons

• Bigger capital commitment

A larger capital is needed to invest in a contributory mortgage fund because there’s only a certain number of investors allowed to take part in the loan. The terms also vary for each mortgage, so you may not be able to get back your capital for several months up to a year.

• Poor liquidity

You can’t easily withdraw your investment until the loan is repaid by the borrower. This can be a problem if you need extra funds for emergency expenses.

Pooled Mortgage Fund

Pooled mortgage funds are linked to a larger basket of funds that are used to invest in loans. Funds are managed by a professional fund manager who handles where to put the monies.

Unlike contributory mortgage funds that focus on the performance of a specific loan, pooled funds base theirs on a wide range of portfolios.

Pros

• Professionally managed

Pooled mortgage funds are managed by experts in the field who are ripe with knowledge and experience in choosing the best loans to invest in. Having a seasoned professional manage the money makes pooled mortgage funds friendly to those new in this kind of investment scheme.

• Lower risk

In a pooled mortgage fund, the risk is lower because the money is spread across numerous loans rather than a single loan. This diversification mitigates the risk of losing a large portion of your money in case a borrower defaults on a mortgage.

• Smaller capital requirement

Pooled mortgage funds are more accessible to investors because of the lower minimum investment amount. By opening the opportunity to a larger group of individual investors, the fund accumulates the needed amount through quantity.

• Better liquidity

Pooled mortgage funds have an initial holding period where you can’t withdraw your money. But once you’re past the holding period, you can access your money and use it any way you want to.

Cons

• Lower returns

Since funds are spread across several loans, you might not be able to maximize the profit from loans with larger returns. Also, since there are more investors involved in a loan, you’ll have a smaller share of the pie.

Which is Better?

Both options have their pros and cons, but one thing for sure is that they can be effective schemes to boost your monthly income. You may prefer a pooled mortgage fund because it’s managed by a professional and poses lower risks. But if you’re okay with riskier investments for higher returns and better fund control, a contributory mortgage fund may be the better option for you.

Before you commit with either a contributory or a pooled mortgage fund, always review your current financial position and your investment objectives. Remember that you’ll basically be lending your money to others, so there’s always a risk attached to it, no matter how small it might be.