Mortgage funds: how they lend on property and what a stop order means

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Kooky

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An advertisement for a mortgage fund usually leads with a rate of return and the words "secured by property". Both are true as far as they go. The money is lent to borrowers, the loans are backed by mortgages over land and buildings, and the interest pays the return. What the advertisement has no room for is everything that decides whether the return arrives and whether the capital comes back: who the borrowers are, how much was lent against each property, who valued it, and how quickly an investor can leave.

Those questions have official answers. The Australian Securities and Investments Commission (ASIC) sets out what an unlisted mortgage scheme should tell retail investors in Regulatory Guide 45, reissued on 5 March 2026. The Corporations Act 2001 gives ASIC the power to halt an offer with a stop order. This guide follows a Queensland investor through both: how the funds work, what the documents must show, and what the regulator's terms mean when they appear in a headline. The rules are Commonwealth rules, so they apply in Queensland as they do elsewhere.

ASIC Regulatory Guide 45 (March 2026); Corporations Act 2001, section 1020E; APRA, Financial Claims Scheme.

What a mortgage fund is

A mortgage fund is a managed investment scheme. Investors buy units, the money is lent to borrowers, and each loan is secured by a mortgage over real property. ASIC's Regulatory Guide 45 defines a mortgage scheme by what it holds: a scheme that has, or is likely to have, at least 50 per cent of its non-cash assets in mortgage loans or in other unlisted mortgage schemes.

The fund itself is not a company an investor owns shares in. It is run by a responsible entity, the company that issues the units, makes the loans or appoints a manager to make them, and answers to ASIC for the scheme. A fund offered to retail investors comes with a product disclosure statement (PDS), the document that describes its features, risks and fees.

The same activity now often trades under a newer name. A "property credit fund" or "private credit fund" that lends against real estate is doing what mortgage funds have long done. ASIC's own releases use both labels for the same schemes: the regulator's October 2026 action on three mortgage schemes arose, it said, from its surveillance of private credit funds.

The guide's benchmarks apply to unlisted schemes. Its advertising standards apply to listed and unlisted schemes alike.

Pooled funds and contributory funds

Two structures sit under the one name, and they behave differently. Regulatory Guide 45 separates them at the outset.

In a pooled scheme, investors' money goes into one pot and is lent to many borrowers. An investor holds an interest in the scheme's property as a whole, not in any particular loan. In a contributory scheme, sometimes marketed as "select your loan", money is lent in relation to a specific property, and the investor's interest is in that particular loan.

The practical difference is where the judgement sits. A pooled investor relies on the manager's lending across the whole book and needs to know how concentrated that book is. A contributory investor is, in effect, deciding to back one loan, so the guide asks for information about that loan: the valuation of the property securing it, the returns forecast to that investor and that investor's ability to withdraw.

Who borrows, and where the return comes from

The return on a mortgage fund is interest. Borrowers pay it, the responsible entity takes its fees, and what is left is distributed to investors. There is no rent and no share of a sale price: if the property rises in value, the lender does not share the gain.

So the borrowers matter. The schemes covered by ASIC's 8 October 2026 release invest, in the regulator's words, in short-term mortgages secured over Australian real property, including vacant land and residential, commercial, retail or industrial properties. Across the wider sector, development and construction are a large part of the picture. In a progress update published on 22 September 2025, ASIC estimated Australian private credit at around $200 billion, about half of it in real estate-related assets, and said that exposure involved significant investment in higher-risk construction and development.

A construction loan differs from a loan against a finished building, because part of the security does not yet exist. Regulatory Guide 45 says the manager's skill and experience are particularly important for these loans, and that money should be advanced in stages, against independent evidence of progress, not paid over at the start.

Two features of the loans themselves are worth recognising in a PDS. The first is capitalised interest. The guide explains that interest may be added to the loan instead of being paid in cash, so the scheme receives nothing during the term and collects capital and accumulated interest together at the end. The second is the gap between what borrowers pay and what investors are promised. ASIC's Report 820, released on 5 November 2025, recorded borrower interest rates in the retail funds it reviewed ranging from 2.50 per cent to 33.51 per cent, against target returns of 4.00 per cent to 10.00 per cent. The report found that few funds showed investors how much of that interest and of the fees borrowers pay stayed with the manager.

First mortgages, second mortgages and the LVR

A mortgage gives the lender the right to be repaid from the sale of the property if the borrower defaults. Ranking decides the order. A first mortgage is paid first. A second mortgage is paid only from what remains after the first lender has been paid in full.

Regulatory Guide 45 treats first-ranking security as the standard for pooled schemes: its diversification benchmark asks that all loans be secured by first mortgages over real property. A fund that lends on second mortgages does not meet that benchmark and is expected to say so, and to disclose the percentage of loans secured by second-ranking mortgages.

The loan-to-valuation ratio (LVR) is the loan divided by the value of the property. It measures the cushion. As an illustration, a loan of $800,000 against a house valued at $1 million is an LVR of 80 per cent: the property could sell for 20 per cent less than its valuation before the lender's capital is touched, leaving aside unpaid interest and the costs of selling.

The guide's lending benchmark sets two ceilings. A loan for property development should be no more than 70 per cent of the latest "as if complete" valuation. Any other loan should be no more than 80 per cent of the latest market valuation. On the same illustrative basis, a project valued at $5 million once finished would support a loan of up to $3.5 million under the benchmark.

That phrase "as if complete" deserves attention. It is a valuer's estimate of what the project will be worth when built, not what the site would fetch today. In Report 820, ASIC gave as an example of better practice a fund that states whether its LVR is calculated on an "as is" or "as if complete" basis, and said that without clear disclosure of the valuation basis an LVR could be misleading. For development loans, the guide also asks funds to disclose the loan-to-cost ratio and to highlight any above 75 per cent, and to identify themselves as significantly invested in development where such loans exceed 20 per cent of scheme assets.

Every LVR depends on the valuation under it. The guide's valuation benchmark asks for an independent valuation before a loan is made and on renewal, by a valuer who belongs to an appropriate professional body in the property's jurisdiction, with valuers rotated. It also asks for a fresh independent valuation within two months of the directors forming a view that a fall in the property's value may have caused a material breach of a loan covenant.

The eight benchmarks in Regulatory Guide 45

The centre of the guide is a set of eight benchmarks, each paired with a disclosure principle. They work on an "if not, why not" basis. A scheme states whether it meets each benchmark. If it does not, it explains why and how it deals with the risk another way. Meeting part of a benchmark counts as not meeting it.

ASIC's preferred layout is a table within the first 15 pages of the PDS showing each benchmark as met or not met, with a pointer to the explanation. The guide expects the information to be kept current: updated when something material changes and at least every half year, and gathered in a single place on the fund's website with a prominent link from the home page.

Among the items the disclosure principles add, one is especially telling for a pooled fund: the proportion of loans in default or in arrears for more than 30 days. The principles also ask where distributions come from. A fund that promotes a particular return is expected to say in what circumstances a lower one may be paid.

Getting money out: liquid, non-liquid and frozen

A property loan runs for months or years, and a borrower cannot be told to repay early because an investor wants cash. That mismatch is the oldest problem in mortgage funds, and the Corporations Act deals with it by sorting schemes into liquid and non-liquid.

For a liquid scheme, the withdrawal benchmark asks that the constitution allow no more than 90 days to pay a withdrawal request, and that requests be paid within that time. Withdrawal on request at any time fits the benchmark only where at least 80 per cent of the scheme's property, by value, is cash, deposits available on demand or within 90 days, or assets that can be sold at market value within 10 business days. Mortgage loans are not assets of that kind.

For a non-liquid scheme, there is no right to withdraw on request. Investors leave through withdrawal offers made by the responsible entity, and the benchmark asks that these be intended at least quarterly. The guide says plainly that where a scheme does not meet the statutory liquidity requirements, members have only a limited ability to withdraw, if any.

A freeze is what happens when a fund that has been paying withdrawals stops. Regulatory Guide 45 notes that a scheme's constitution typically gives the responsible entity a discretion to suspend withdrawals, and gives the example of a scheme that freezes redemptions after a large spike in requests. The guide also records an uncomfortable fact: once a scheme is non-liquid, there is no statutory limit on how long it may stay that way.

During a freeze, investors wait for loans to be repaid or security to be sold, and the outcome depends on what those loans are worth. ASIC's guide warns that liquidity in these funds often depends on new money coming in, on borrowings or on investors rolling over at the end of a term, and its liquidity benchmark asks for cash flow estimates that assume no new money arrives at all.

Moneysmart, ASIC's consumer site, puts the general point in one line for all managed funds: funds can restrict, delay or stop withdrawals in some circumstances, and the PDS says when.

The target market determination

Since 5 October 2021, a second document has sat beside the PDS. Under the design and distribution obligations in Part 7.8A of the Corporations Act, the issuer of a financial product offered to retail clients must prepare a target market determination (TMD). ASIC's Regulatory Guide 274 describes it as a written document that sets out the class of consumers the product is designed for, the conditions and restrictions on how it is distributed, and the events and periods that trigger a review. It must be available to the public free of charge before the product is distributed.

The obligation falls on the firms, not the investor. The issuer and its distributors must take reasonable steps that are likely to result in the product reaching the people described. If an issuer becomes aware of a significant dealing outside the target market, it must tell ASIC within 10 business days.

A TMD typically states how much of a person's investable money the product is designed to represent, what risk level it carries, how long the money should be left and how often it can be accessed. Report 820 found that half of the retail private credit funds reviewed rated themselves medium risk or higher in their TMDs, and that seven used in-house "investment grade" labels although no external agency had rated them.

One group sits outside all of this. Moneysmart notes that wholesale clients, a classification generally based on income and assets, can be sold financial products without a PDS or a TMD. An offer limited to wholesale clients may therefore come without the documents this guide describes.

What an interim stop order is, and how long it lasts

A stop order is ASIC's way of halting an offer while a document is fixed. It is an administrative order, not a court ruling and not a finding that money has been lost.

There are two routes. Under section 1020E of the Corporations Act, ASIC may act where a PDS is defective or is not worded and presented in a clear, concise and effective manner. Under the design and distribution regime, it may act on a deficient TMD. In both cases the order names conduct that must stop while it is in force: typically offering, issuing or selling interests in the product.

The section also allows a further interim order made during the hearing itself, which has no fixed length and runs until ASIC decides on a final order or revokes it. Most orders never get that far. In a release dated 22 September 2026, ASIC said it had issued 99 interim stop orders and two final stop orders under the design and distribution regime since it began. In the example reported in that release, an editor's note records that the orders were revoked on 1 October 2026 after the issuer amended its TMDs.

The most recent example involving property lending came on 8 October 2026, when ASIC announced an interim stop order on the PDS for the ASCF Premium Capital Fund, the ASCF Select Income Fund and the ASCF High Yield Fund, three registered schemes with $251.8 million under management at 30 June 2026. The regulator's stated concerns were about disclosure, including information on the loan portfolio and its diversification, and it said the issuer would have an opportunity to make submissions before any decision on final orders.

A stop order on a PDS prevents new units being offered or issued. It is aimed at the offer document, and it does not by itself freeze withdrawals or change what the fund's loans are worth. Whether withdrawals continue is a separate question, answered by the fund's constitution and its liquidity.

What ASIC's private credit surveillance found

Between October 2024 and August 2025, ASIC reviewed 28 private credit funds: 20 registered funds open to retail investors and eight unregistered wholesale funds. The findings were published as Report 820 on 5 November 2025.

On transparency, only four of the 28 funds published information about the interest rates charged to borrowers. Only two retail funds put a figure on the interest and borrower fees they kept and counted it in the management fee shown in the PDS. Stated management fees in the retail funds ranged from 0.38 per cent to 6.00 per cent.

On conflicts, five retail funds had lent to related parties of the responsible entity or the investment manager, the practice the fourth benchmark is written around. On loan quality, reported defaults generally ranged from nil to 6 per cent of the loan book, and one fund using a very wide definition reported 20 per cent. No fund reviewed disclosed everything in the reporting template ASIC suggested, and all left out the source of their distributions.

The report was not only critical. It identified better practices alongside poorer ones and set out 10 principles for the sector, covering transparency, design and distribution, fees and costs, conflicts of interest, governance, valuations, liquidity and credit risk among them. It also named the regulator's focus for 2026: the distribution of private credit funds to retail clients, directly and through advisers, and fees, margins and conflicts in wholesale funds, including those lending on real estate. The October 2026 stop order came out of that program.

What does not protect the money

The word "secured" in an advertisement describes the fund's position against its borrowers. It says nothing about the investor's position against the fund. An investor holds units, not a mortgage, and Regulatory Guide 45 notes that where a scheme has borrowed, its creditors rank ahead of investors.

Nor is a unit a deposit. The Financial Claims Scheme, administered by the Australian Prudential Regulation Authority (APRA), protects deposits of up to $250,000 per account holder at each bank, building society or credit union authorised by APRA, and is activated by the Australian Government if one of those institutions fails. According to APRA, it covers transaction and savings accounts, term deposits and similar deposit accounts. Units in a managed investment scheme are none of those things, whatever the product is called and however it is described.

The guide also asks that an advertisement quoting a return carry a prominent statement of the risk of a lower one, that it disclose any longer withdrawal period the fund is permitted to apply, that it not suggest the product suits a class of investor, and that it agree with the PDS.

The mortgage protects the fund against its borrower. Nothing comparable stands between the fund and the investor except disclosure.

Whether a particular fund suits a particular person depends on that person's circumstances, which is a question for a licensed financial adviser and not for a general guide.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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