A managed mortgage fund (or scheme) is an investment vehicle where many investors pool capital, which is then lent out as mortgages secured by property (residential, commercial, or mixed) rather than ordinary bank deposits or shares. The loans might be “first mortgages” (senior, registered mortgages) or subordinate (second mortgages, mezzanine, etc.), depending on the fund. Investors receive income (interest) from those loans, less fees, and sometimes get paid regularly (monthly or quarterly) from those returns.
These funds are often seen as income-generating options, especially when bank deposit (term deposit or savings) interest rates are low. Because mortgage rates (especially from non-bank lenders) tend to be higher to reflect credit risk and property security, mortgage funds often offer higher yields than low-risk fixed income alternatives.
How Mortgage Funds Are Structured & Operated
Here are the key elements of their structure, the typical actors involved, and how operations run.
| Component | Typical Set-Up / Role |
| Responsible Entity / Fund Manager | Runs the fund (or scheme), handles origination of mortgages or commissions them, makes credit decisions, manages collection or enforcement if borrowers default. Must have licensing / regulatory obligations. |
| Investors | Can be retail or wholesale, individuals, super funds, trusts, etc. They invest by buying “units” or shares in the managed investment scheme. |
| Borrowers | Entities or individuals who take out the mortgage-loans, using property as collateral. Could be residential buyers, property developers, commercial property owners, etc. |
| Security & Underwriting | Because loans are secured by property (i.e. there is a legal mortgage over real property), the “loan-to-value ratio” (LVR), valuations, covenants, borrower creditworthiness, etc., become central. Some funds also diversify across multiple mortgages to spread risk. |
| Income / Distributions | Investors receive distributions derived from interest payments less fees, losses, etc. Some funds aim for stable regular income. |
| Liquidity / Withdrawals | This is often a constraint: borrowing in mortgages tends to be relatively illiquid assets, so funds may have restrictions, delays, or suspensions of redemptions depending on how easy it is to convert assets or get repayments. |
| Fees | Arrangement fees, ongoing management fees, possibly performance fees, valuation / legal costs in enforcing or managing mortgages, plus costs associated with regulatory compliance. |
Two variants:
- Larger, mainstream managers (i.e. well-known investment firms or non-bank lenders) offering mortgage funds, bringing more scale, possibly more robust risk management.
- Smaller managers or boutique funds, which might specialise in certain property types or geographic areas; sometimes with less transparency or fewer resources, which increases some risks.
Regulatory Framework in Australia & ASIC’s Role
Managed mortgage funds are regulated under Australia’s financial laws. Key parts and how ASIC (Australian Securities & Investments Commission) fits in:
- Managed Investment Schemes (MIS) under the Corporations Act 2001
If a fund collects money from investors, pools it, and invests in mortgages or mortgage-schemes, it will often be a managed investment scheme. As such, it must comply with Chapter 5C of the Corporations Act. (ASIC) - Responsible Entity licensing
The fund must have a responsible entity (RE) who is licensed, holds an Australian Financial Services Licence (AFSL), and meets governance, disclosure, audit, compliance requirements. (ASIC) - ASIC Regulatory Guide 45 (RG 45): Unlisted Mortgage Schemes
This is particularly important if the scheme is unlisted and available to retail investors. RG 45 sets eight benchmarks plus eight disclosure principles that funds must address (in their Product Disclosure Statements, ongoing reports, etc.). These cover items such as liquidity, borrowing, loan portfolio diversification, valuation practices, LVRs, withdrawal rights. (ASIC Downloads) - Disclosures
The PDS (Product Disclosure Statement) must give investors enough information: how and where their money is invested, what the risks are, what happens if the fund needs to suspend redemptions, etc. If benchmarks are not met, the fund must explain why not, and how they manage the consequences. (ASIC Downloads) - Supervision, enforcement
ASIC monitors compliance, investigates issues such as misleading disclosure, conflicts of interest, illiquidity, valuation issues. If fund managers fail to comply, ASIC can impose penalties or orders. (Grant Thornton Australia) - Related regulatory bodies
Depending on structure, other regulators may be involved (e.g. Australian Prudential Regulation Authority (APRA) in case of regulated entities, state regulators for property/land title issues, audit/regulatory standard bodies). But for pure mortgage funds offered to retail investors, ASIC is central.
Investor Protections
These are the protections built in (or intended) for investors in mortgage funds.
- Disclosure obligations: The benchmarks and disclosure principles in RG 45 are designed to ensure transparency: liquidity, valuations, LVRs, borrowing, related-party deals, etc. Knowing what you invest in is the first line of protection. (ASIC Downloads)
- Regulation of Responsible Entities: REs must be licensed, governed, audited; they must maintain compliance plans, internal governance, conflict of interest policies. (ASIC)
- External dispute resolution / complaints: If you are a retail investor, there are regulatory schemes and ombudsman arrangements. Funds must have documentation explaining how complaints work. ASIC can enforce mis-selling or misleading disclosures.
- Capital security via property: Because the loan is secured by real property, the security gives a fallback in case of default (though recovery can be slow, costly, and values can fall).
- Liquidity rules and risk disclosure: Funds must disclose how withdrawals / redemptions work, when they might be suspended, what delays might happen. Uncertainty in liquidity is a known issue; full transparency is required. (ASIC Downloads)
What Are Some Positive Features & Potential Advantages
When Mortgage Funds perform well, here are the typical benefits:
- Higher Yield Relative to Bank Deposits / Fixed Income: Investors frequently see higher interest rates than what banks offer on term deposits or savings when rates are low, due to the higher risk and non-bank lending margins. (Active Property Group)
- Regular Income Flow: Because mortgage repayments are usually periodic (monthly, etc.), many funds can distribute income regularly, which is attractive especially in low interest-rate environments.
- Diversification: By investing across multiple mortgages / borrowers, or across property types, the risk that a single borrower defaulting will severely damage the whole fund is reduced.
- Access without needing to buy property: Investors can gain exposure to property/collateralised lending without the hassles of being a landlord. Smaller minimum investments than buying whole properties.
- Role in private credit / alternative income: For many investors (particularly superannuation funds, high net worth, wholesale), mortgage funds are part of broader private credit strategies, sometimes with less correlation to public equity markets.
Common Negative Features & Pitfalls (Risks)
Despite the appeal, there are serious risks and potential downsides. Here are common pitfalls:
| Risk / Pitfall | Explanation |
| Liquidity Risk | Mortgages are illiquid compared to cash. If many investors want to exit at once or the fund needs to meet withdrawals, there could be delays, or suspensions. Some funds have had to freeze redemptions because the loans are tied up or because there is not enough uncommitted cash. (The Australian) |
| Market Risks / Property Value Declines | If property values fall (due to economic downturn, oversupply, interest rate rises, etc.), the security might be worth less than expected, especially for second mortgages or if LVRs are high. Recovery costs in default can be high. |
| Credit / Borrower Default Risk | Borrowers may default. Fund managers may underestimate credit risk, or assume that because there is a mortgage, loss risk is low — this is not always true. |
| Valuation Issues | How often valuations occur, whether they are independent, whether there are triggers for marked declines, etc. Disputes over value can affect how well investors are protected. RG45 requires disclosure of valuation policies. (ASIC Downloads) |
| Interest Rate Risk / Spread Compression | If fund borrowing costs rise, or the interest rates charged to borrowers don’t fully track the cost of funds, margins may compress, reducing distributions to investors. Also, in rising interest rate environments borrowers may struggle. |
| Related-Party and Conflict Risks | Sometimes managers are related to lenders, valuers, or have incentives that are misaligned. Proper governance is key. RG45 includes disclosure standards for related-party transactions. (ASIC Downloads) |
| Regulatory and Disclosure Risks | If disclosure is weak, investors might not understand risks, liquidity constraints, fees, etc. Smaller / boutique managers may not have the same track record or transparency. |
| Capital Loss | Not only income but capital may be lost — if a loan defaults, property sale costs, or general fund failure. These aren’t bank deposits; in many cases the investment is unguaranteed. |
| Illiquidity + Maturity mismatch | The fund might promise fairly regular withdrawals, but underlying assets have long-term maturities or delays. That mismatch can lead to stress. RG45 specifies this as a benchmark: liquidity, withdrawal arrangements. (ASIC Downloads) |
Recent Examples / Warnings
- Merricks fund redemption freeze (2025): A $1.2B fund run by private lender Merricks froze redemptions due to liquidity pressure. Investors were offered units instead, with returns quarantined and payouts delayed until new cash flows came in. (The Australian)
- ASIC’s growing concern over private credit & mortgage lending transparency: ASIC has flagged that private markets (including mortgage-type lending) often suffer from “opacity, conflicts, valuation uncertainty, illiquidity and leverage” as key risks. (National Seniors Australia)
- Banks dropping term deposit rates: As term deposit rates decline, some investors feel returns are barely keeping up with inflation, pushing them to look at alternatives including mortgage funds. (Broker Daily)
ASIC’s Perspective and Regulatory Warnings
ASIC’s stance has multiple dimensions:
- It sees that many unlisted mortgage schemes available to retail investors need better disclosure under RG45. Benchmarks and principles must be clearly addressed. If benchmarks are unmet, there must be “if not, why not” disclosures. (ASIC Downloads)
- ASIC has warned that product failures in private credit (which includes mortgage funds) are possible if lenders/managers fail to manage risks. (Money Management)
- ASIC is particularly wary of misleading or inadequate advertising and presentation of returns, especially where high yields are promised without full disclosure of risks (liquidity, default, valuation). RG45 also covers advertising standards. (ASIC Downloads)
- Part of ASIC’s reviews of managed investment schemes has identified gaps in compliance plans, especially relating to obligations under newer rules (Design & Distribution Obligations, Internal Dispute Resolution, etc.). Some responsible entities have not updated their compliance plans to reflect current regulatory expectations. (Grant Thornton Australia)
When and Why Investors Consider Mortgage Funds
Investors often turn to mortgage funds when:
- Bank deposit rates / savings / fixed-interest yields are low, so the income from term deposits is unattractive. Mortgage funds may offer higher yields in exchange for higher risk.
- They seek regular income streams (e.g. retirees, or those depending on distributions).
- To diversify away from more volatile asset classes (shares, property ownership) while still having exposure to property-backed credit.
- To access exposure to private credit or real asset collateral without being a lender or property owner themselves.
What to Check Before Investing — What “Due Diligence” Should Cover
If you’re thinking of investing, here are the key questions and metrics to investigate:
- PDS & Disclosure Documents
- Does the PDS clearly state the RG45 benchmarks and whether the fund meets them? If not met, are the reasons credible?
- What are the fund’s withdrawal/redemption policies? Under what circumstances can these be suspended or delayed? What notice periods?
- What is the minimum investment, fees, ongoing fees, performance (if disclosed), history of defaults.
- Liquidity & Maturity Mismatch
- What portion of the portfolio is in mortgages with long terms or slow repayment schedules?
- What portion is in cash or near-cash or short maturities that can be used to meet withdrawals?
- Loan Portfolio Quality
- What are the Loan-to-Value Ratios (LVRs)? First vs second mortgages? Geographic concentration? Type of property? Commercial vs residential? Borrower credit profiles?
- Valuation & Security
- How are properties valued (frequency, independence, review triggers)?
- What happens in default? What is the cost and time to realise security? Are there legal or practical impediments?
- Fees & Costs
- All fees, including management fees, legal / enforcement fees, arrangement fees, etc. They reduce net returns.
- Manager / Responsible Entity Track Record
- How experienced is the fund manager in mortgage lending, in underwriting, dealing with defaults?
- How well governed is the entity? Are related-party transactions clearly disclosed?
- Regulatory Compliance & Oversight
- Is the fund registered or unregistered? Is it subject to oversight under MIS rules and AFSL licensing?
- Has ASIC or other bodies raised any concerns or enforcement actions?
- Scenario Analysis
- What happens under stressed property prices? Rising interest rates? Rising defaults? Slower loan repayments?
Regulatory / Legal Obligations to Be Aware Of
- Must comply with the Corporations Act (especially Chapter 5C for MIS).
- Must have a Responsible Entity under AFSL regime.
- Must comply with RG45 for unlisted mortgage schemes available to retail investors.
- Compliance plans, audit obligations.
- Advertising rules: no mis-led promises of returns that do not reflect risks.
- Obligations under financial services law: fair dealing, disclosure, conflicts of interest.
Typical Returns vs Other Alternatives & Recent Data
While specific returns of mortgage funds vary, common observations include:
- Mortgage funds often yield more than term deposits or government bonds, especially in low interest rate periods. For instance, some sources say mortgage funds deliver higher yields because they are taking on higher credit risk and more illiquidity. (Active Property Group)
- However, when bank deposit or fixed income rates go up (e.g. cash rate hikes), sometimes those low risk alternatives start to catch up or even surpass risk-adjusted returns from mortgage funds once you adjust for defaults, fees, delays, etc.
- Term deposit rates in mid-2025 have declined in Australia; some ~1-year or 3-year deposit rates now are substantially lower compared to past years, leading investors to look elsewhere. (Broker Daily)
- The growth of the residential mortgage-backed securities (RMBS) market in Australia has been strong: issuance reached about A$56.35 billion in 2024 for RMBS. That shows interest in mortgage-backed instruments more broadly. (vaneck.com.au)
Common Issues / What Can Go Wrong
- Suspension of redemptions or delays: Even if stated withdrawals are “monthly” or “quarterly”, in stressed times a fund might delay or suspend withdrawal rights when incoming cash or repayments are low. Investors may not be able to exit when they want.
- Capital loss due to default and foreclosure costs: Recovering from default is costly and time-consuming—legal, valuation, and market costs matter.
- Overoptimistic valuations of collateral or slow recognition of property value falls.
- Manager risk: Poor underwriting standards, weak governance, conflicts of interest, lack of experience. Smaller managers may under-estimate risk.
- Interest / rate risk: If rates rise, borrower repayments may suffer (especially variable rate mortgages), or fund’s cost of capital (if the fund borrows) may rise.
- Poor disclosure or misleading marketing: Promises of high, stable returns without clear risks mislead some investors. ASIC warns about this.
Why Professional Advice Matters
Given the above, here’s why talking to a financial adviser, or due diligence specialist, is strongly recommended:
- Advice helps you assess whether a mortgage fund fits your risk tolerance, income needs, and liquidity preferences.
- Advisers can compare different funds (fees, track record, liquidity) and help you avoid ones with weak disclosure or poor governance.
- They can help you model downside scenarios (defaults, market falls, rate rises) and see if your capital is adequately protected.
- Also, tax and legal structures matter: if investing via SMSF, trust, etc., rules differ; advisers can help avoid unexpected costs or regulatory compliance issues.
Summary: Should You Invest?
Managed mortgage funds can be attractive when:
- Bank deposit rates are low, and you want more yield.
- You are comfortable with higher risk (credit risk, property risk) in exchange for higher income.
- You don’t need instant liquidity, or are okay with some flexibility around redemptions.
- You trust (or have vetted) the fund manager, understand the disclosure, have looked at the loan portfolio, and are comfortable with the likely downside.
They are less suitable when:
- You need full liquidity and safety of principal.
- You are very risk-averse.
- You are investing with little time horizon, or cannot absorb potential losses.
References
- ASIC, “Managed investment schemes” page. (ASIC)
- ASIC, “Regulatory Guide 45: Mortgage schemes: Improving disclosure for retail investors” (2017). (ASIC Downloads)
- ASIC, “Investing in mortgage schemes” (Moneysmart guide). (Moneysmart)
- Active Property Group, “The Pros and Cons of Pooled Mortgage Funds in Australia”. (Active Property Group)
- Merricks fund example, “Redemption freeze on $1.2bn fund” news. (The Australian)
- ASIC reports on private credit risks & transparency: “Private lending transparency under scrutiny” etc. (theadviser.com.au)
- Data on term deposit rate declines in Australia. (Broker Daily)
- VanEck / ABS / RBA data on residential mortgage-backed securities growth. (vaneck.com.au)
- ASIC findings about gaps in compliance plans. (Grant Thornton Australia)
