A mortgage trust is a unit trust investment where invested money is pooled and then invested by the manager of the trust in a range of mortgages. The money is invested by lending to another party for the purpose of purchasing a property. In most cases the property will already exist, but some mortgage trusts will lend to people undertaking property development.
The loan is secured by means of a mortgage over the property. This means that should the borrower be unable to make the agreed payments on the loan, the mortgage trust (as mortgagor) may take possession of the property. The property is then generally sold in order to recover the amount owing to the trust.
To ensure that the value of the property will at least cover the amount of the loan, most mortgage trusts lend no more than an agreed percentage of the value of the property. Between 66 per cent and 75 per cent is the normal range of lending, this is called the ‘loan-to-valuation ratio’ (LVR).