With equities volatile, fixed income returns still muted, and commercial property facing headwinds, more investors are turning to an often-overlooked sector – mortgage funds.
According to Ben O’Hara, Executive Director and Credit Committee Chair at GPS Investment Fund Limited (GPS), investor appetite is rising for asset-backed investments that offer regular income, capital protection, and a clear risk profile.
“We’ve coined a phrase called the Goldilocks zone where returns are just right,” said O’Hara. “Enough to satisfy investors, but not so high that it pushes us into riskier lending or misaligned pricing. That balance is critical.”
Mortgage funds allow investors to pool capital, which is then lent, typically secured against real estate to commercial borrowers such as developers. Investors earn interest on those loans and, crucially, rank ahead of equity in the repayment waterfall. With flexibility across pooled and contributory structures, mortgage funds can also offer greater liquidity than traditional property trusts.
“Liquidity is one of the advantages,” said O’Hara. “Some pooled funds offer redemptions every 90 days or monthly. That can be a game-changer for income-focused investors.”
The appeal is growing as private credit becomes a more established segment of the market, now worth more than $50 billion in Australia and forecast to reach $90 billion within the next 6-7 years. But as more capital flows into the sector, O’Hara cautions that disciplined deployment remains critical.
“It’s easy to lend money. Getting it back is the skill,” he said. “There’s a real risk right now of funds overextending, chasing deals they shouldn’t be doing just to maintain usage rates.”
Key risk factors include leverage, borrower quality, and loan-to-value ratios (LVRs). O’Hara emphasises that investors should ask where their money is going, who is borrowing it, and how risks are being mitigated. In some cases, specialisation such as focusing on a particular asset type or region can be an advantage.
“Some may see that as a lack of diversification,” said O’Hara. “But deep knowledge of local markets, from build costs to buyer demand, helps make faster, more informed lending decisions.”
Transparency is another major factor. While disclosure obligations vary between retail and wholesale funds, O’Hara believes investors should expect clear reporting, regardless of structure.
“Disclosure should be best-practice, not just a compliance exercise,” he said. “Investors are increasingly sophisticated. They want to know exactly where their money is going and on what terms.”
Many of the current challenges in the property sector stem from structural issues, one region where this is particularly apparent is in South East Queensland. As O’Hara explains, population growth and major infrastructure projects, including the lead-up to the 2032 Olympics, are creating capacity constraints across the residential construction industry.
“There’s simply not enough skilled labour to meet demand,” he said. “Unless governments act on planning reform, training pathways, and skilled migration, we’re facing a decade-long shortfall in residential delivery.”
That has implications not just for housing affordability but also for development finance. Delays, cost escalations and supply bottlenecks all increase risk, making rigorous borrower assessment and project selection more important than ever.
Mortgage funds may have once been niche, but as they move into the mainstream, investors are demanding more, that is more transparency, more discipline, and more clarity around how capital is used. For those seeking stable, income-generating alternatives to traditional fixed income or property, mortgage funds are increasingly being viewed as a compelling part of a diversified portfolio.
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