Mortgage funds vs direct mortgage investment in New Zealand: the real difference

Put money into a mortgage fund in NZ and you buy units in a pool that the manager lends out as it sees fit. Invest directly and you fund one loan you selected, with your name on its registered mortgage and repayments paid to your own account. The gap shows in a downturn: a fund can freeze, a directly held loan cannot.

Both earn interest from loans secured on New Zealand property, and both usually beat a term deposit. They differ on control, visibility and access to your money, differences this country tested around 2008 and again when Du Val Group fell over in 2024.

What is a pooled mortgage fund?

A pooled mortgage fund takes in money from many investors, puts it in one pot and spreads that pot across a book of loans. What you hold is a unit, a slice of the whole book, rather than a claim on any single loan. Decisions sit with the manager: who borrows, on what terms, how the book is valued and when unitholders can take money out.

Some New Zealand funds are offered to the public under a product disclosure statement; others are wholesale-only, with lighter disclosure. Their attraction is convenience. One investment gives you one income stream and exposure to dozens of loans at once. The price is that your only view of those loans is the manager’s reporting, usually expressed as averages, and you are trusting the manager’s credit judgement, governance and integrity to hold up.

How does direct (contributory) mortgage investment work?

Direct investment, also known as contributory mortgage investment, means lending into a single named loan and holding a matching share of the security behind it. Before committing, you know the address, the borrower and purpose, the amount, the term and the rate.

That is how co-funding works with HomeSec Business Finance, a private business lender lending since 2004, with its New Zealand office in Auckland. HomeSec lends mostly from its own balance sheet. On selected loans it asks wholesale investors to come in alongside it, and it keeps its own money in every one. Each opportunity arrives as a due diligence pack by email. If you take it up, you choose your amount, and your name is recorded on the mortgage registered with LINZ (or on the caveat, where that is the security) for exactly that sum. Principal and interest are paid to your own bank account.

The loans are short to medium term business loans, usually running 1 to 12 months and up to NZ$1 million, secured by first and second mortgages over New Zealand residential or commercial property. Residential lending stops at an 80% LVR, commercial lower, and there is no construction or development lending. The step-by-step version is in how private mortgage investment works.

How do a mortgage fund and direct investment compare side by side?

The last two lines favour the fund: it spreads a modest sum over a whole book on day one, while co-funding needs wholesale status, time and patience. In exchange you get choice, a clear view of the security, your name on the title and no exit queue.

Why do mortgage funds freeze withdrawals?

A freeze, sometimes called a gate or a redemption freeze, is a fund suspending or rationing withdrawals. The power usually sits in the trust deed or governing document, so a manager can use it at short notice.

The underlying problem is timing. Unitholders are told they can cash out every month or quarter, but their money is out on loan, and a borrower cannot be made to repay early because a unitholder wants cash. Development loans are the worst for this, because they tend to be repaid only once the project is built and sold.

In good years, new money and loan repayments cover whoever is leaving. In a scare, exit requests climb just as new money stops. The manager can sell loans cheaply, pay the first leavers in full and leave everyone else the weaker assets, or shut the door. Shutting the door is the usual answer: fairer between unitholders, but nobody is paid until it reopens.

What happened to New Zealand mortgage funds in 2008?

When the global financial crisis reached these shores, pooled mortgage funds were among the first casualties. The Guardian Trust Mortgage Fund, holding $249 million for about 3,700 investors, froze on 29 July 2008, and by January 2009 a wind-up had been proposed. On 29 October 2008 AXA New Zealand froze three mortgage funds holding $225 million.

The funds had plenty of company. The FMA lists 51 finance companies that went into receivership or liquidation, or froze payments, between 2006 and 2012, and in 2016 RNZ reported that about 200,000 investors were still owed around $3 billion. Finance companies sold debentures rather than units, but the pattern matched: money from the public, pooled and lent on at the company’s discretion to borrowers the investor never chose or met.

The whole period is covered in New Zealand’s finance company collapses.

What happened at Du Val?

The 2020s showed the lesson had not stuck everywhere. Du Val Group, an Auckland property developer that also raised money from wholesale investors, went into interim receivership in August 2024 on the FMA’s application and was then placed in statutory management, covering about 70 entities. PwC’s first estimate was about $240 million owed, including $41.2 million to investors. By September 2025 known debt stood at $268 million, and RNZ reported that investors in the Du Val Mortgage Fund and Opportunity Fund were unlikely to benefit from recoveries.

There were public warnings along the way. The FMA issued a direction order over the Du Val Mortgage Fund’s advertising in October 2021. In October 2022 it formally warned seven wholesale property investment firms, including Du Val entities, over eligible investor certificates that did not meet the rules. A proper wholesale process protects investors as much as it protects the firm. The full account is in what happened at Du Val.

What are the three ways mortgage investors lose money?

Not every failure has the same cause, and knowing which one you are exposed to matters more than a general sense of “risk”. New Zealand’s record points to three.

1. Losses on development lending

The first is lending that goes bad, and the riskiest lending is to developers. Strategic Finance is the clearest local case. In August 2010, interest.co.nz reported that 62% of its book was development lending (38% commercial and 24% residential), and 58% of the net loan book sat behind $544.4 million of higher-ranking debt as second mortgages.

Partly built projects are hard to value and harder to sell, budgets overrun, and repayment depends on whatever market is waiting at completion. In November 2025 the Reserve Bank noted company liquidations running above average, particularly in construction, and that some developers are turning to non-bank and offshore lenders.

2. Frozen withdrawals

The second is the timing problem described earlier: the loans can be sound and you still cannot reach your money. As Guardian Trust and AXA unitholders found in 2008, time without access to your own capital is a cost even when nothing is lost.

3. Group structures you can’t see into

The third is structural. When a fund sits inside a wider property group, its investors can end up tied to the fortunes of the whole group rather than to a set of loans they can inspect. Du Val’s fund investors were swept up when the group entered statutory management, alongside its creditors and other investors.

Why do many funds pay less for more risk?

A unitholder has no say over which loans are made, no sight of the properties, no idea what borrowers pay or what the manager keeps, and can be locked in. Meanwhile, most of the income market still pays single figures. In mid-September 2026 the major banks were paying around 4% for 12 months, the top 12-month rate from a non-bank deposit taker was 5.70%, and peer-to-peer platforms, which are not deposits, showed 6.00% to 6.75%.

HomeSec co-funders earn 12% to 18% p.a. on the loans they choose, see each pack in full, are named on the mortgage and have HomeSec’s own money in the same loan. The rates reflect what borrowers are paying for: short terms, decisions within hours and settlement possible within days. Most are established businesses drawing on property equity, not weak borrowers. Some of the difference is also structural. A fund’s fees and margin come out between what borrowers pay and what unitholders receive, and the result is blended across strong and weak loans alike. A co-funded loan carries its own rate, printed in the pack before you decide.

What difference does your name on the title make?

Inside a fund, the mortgages sit with the fund, a trustee or a custodian. Your claim is on the fund, and only indirectly on its book. If it gets into difficulty, you wait with every other unitholder, on a timetable set by the manager, a receiver or, as Du Val investors found, a statutory manager.

Co-funding reverses that. Your interest is in one loan over one property, registered in your name for the amount you contributed. The borrower owes that money to you and repays it into your account.

A direct loan can still go wrong: borrowers default, and property can be slow to sell. The mortgage is then enforceable under the Property Law Act 2007, and HomeSec runs the process with specialist lawyers, its own money in the same loan. What decides the result is that loan’s borrower, property and equity cushion, not how many strangers want their money back in a jittery month.

What protections come with investing loan by loan?

Structure never removes risk, but it decides which risks land on you and how clearly you see them.

• Your call on every loan. HomeSec’s 50-point checklist screens each loan first; you still decide yes or no.
• Security in your own name. A registered interest matching your contribution, rather than units in another party’s vehicle.
• Existing property only. No construction or development, and nothing unusual or slow to sell.
• Room for prices to fall. Residential LVR capped at 80%, commercial lower, based on current values when the loan is made.
• Short commitments. Terms of usually 1 to 12 months keep capital turning over.
• Skin in the game. HomeSec has its own money in each loan and earns mostly when loans repay.

The complete set is in our lending rules.

What do you give up by investing directly?

Wholesale investors only. Co-funding is offered under the Financial Markets Conduct Act 2013 to wholesale investors, most often eligible investors, who set their own contribution to each loan from NZ$100,000.

Homework is part of the deal. Each pack needs reading and a decision. That is the whole idea, but it takes time.

Diversification is gradual. Rather than owning a slice of a whole book from the start, you build a spread over months: perhaps a loan secured on an Auckland commercial building one month and one over a Tauranga home the next.

Money is committed for the term. Should you need it back early, HomeSec will buy out your share and repay your principal on request. Borrowers sometimes repay late too; getting your money back covers what happens then.

No deposit protection. Since 1 July 2025 the Depositor Compensation Scheme has protected up to $100,000 per depositor at each deposit taker, and only for deposits. A mortgage fund sits outside it, and so does a co-funded loan.

What should you ask any mortgage fund or private credit manager?

Whether you stay in a fund or lend directly, six questions quickly show how open a manager is prepared to be:

1. Will you show me each loan, or just figures for the whole book?
2. Is the security registered in my name?
3. Does your own capital sit in the same loans as mine?
4. How much of the book is land, construction or development lending?
5. What rate is the borrower charged, and what share do you keep?
6. Where does the money for withdrawals come from, and when can you suspend them?

Who is direct mortgage investment best suited to?

It suits investors who want strong, secured income, want to see what each dollar is lent against, and would rather not queue for withdrawals behind strangers. Try putting a live HomeSec loan pack beside your fund’s latest quarterly report. To see one, register your interest; our Funding Manager, available seven days on 09 888 6550, will get back to you.