First or Second Mortgage Funds – Which is Better for My Investment Strategy?

First or Second Mortgage Funds – Which is Better for My Investment Strategy?

Mortgage funds have emerged as a noteworthy investment, offering a way into the real estate market without the direct responsibilities of property ownership. Mortgage fund investment provides a strategic avenue for investors seeking to diversify their portfolios through consistent income generation.

Within mortgage investment funds, the difference between first and second mortgage funds often has investors new to mortgage investment wondering which is better for their portfolio. Understanding the core differences between these two types of mortgage funds is crucial for investors to align their investment strategies with their financial goals and risk tolerance.

Understanding the First Mortgage Fund

A first mortgage fund operates by lending money secured by a first mortgage on real estate. In this arrangement, the fund holds the primary claim on the collateral in case of a loan default. The Loan-to-Value Ratio (LVR) is generally capped at a lower threshold, often around 65 per cent.

The benefits of first mortgage investments include a lower risk profile due to the priority claim on the property and a steady income from interest payments. However, the returns might be lower compared to higher-risk investment options, reflecting the lower risk associated with first mortgage funds.

Understanding Second Mortgage Investment Funds

A second mortgage fund operates by lending money that is secured by a second mortgage on real estate. Unlike first mortgage funds, they are the second priority when claiming the collateral in the event of a loan default. The Loan-to-Value Ratio (LVR) for second mortgages can extend to 75 per cent, indicating a higher level of assumed risk compared to first mortgages.

Second mortgage investments tend to offer higher returns due to the elevated risk. In a default scenario, repayment to second mortgage holders occurs only after the first mortgage is fully settled, making it a potentially higher-risk, higher-reward investment avenue.

Comparing First and Second Mortgage Investment

When juxtaposing first and second private mortgage funds, the difference in returns, risks, and suitability for different investor profiles becomes apparent. First mortgage funds, with their lower LVR cap, present a more conservative investment avenue. They provide a safer option for investors with more modest returns, aligning well with risk-averse strategies.

Second mortgage funds, on the other hand, offer investors the prospect of higher returns due to the increased risk. This type of investment suits individuals with a better understanding of real estate and a higher risk tolerance. Typically, these investors are well-versed in evaluating risks and are seeking higher returns that come with second mortgage funds. Whether they are seasoned property investors, professionals in related fields, or simply those willing to embrace higher risks for potentially higher rewards, second mortgage funds offer a more strategic, albeit riskier, investment avenue.

Mortgage Fund Investment With Arthurmac

Understanding the distinction between first and second mortgage funds is pivotal, each catering to different risk profiles and investment goals. Knowing the differences is key to making an informed investment decision that aligns with your financial aspirations.

If you are looking to invest in mortgages through a pooled or contributory mortgage fund, Arthurmac is well-positioned to guide you through the intricacies of your investment, with over 20 years in the industry. 

Reach out to our professional team on (03) 9585 0090 or via our online contact form to explore how mortgage funds can enhance your investment strategy today.

Disclaimer: Please be advised that it is highly recommended to conduct thorough research and seek guidance from a financial expert prior to making any investment decisions. It is further recommended to regularly review your investment portfolio and make necessary adjustments to ensure it aligns with your financial goals.

Stuart Styles

Managing Director Stuart has 16 years of experience as a Financial Services professional having worked previously in asset finance & management roles within the Motor Industry.