Private Mortgage Investing – an Investment Alternative to Seriously Consider!
In today’s current tight credit environment, there are many borrowers, with good quality marketable properties, and a good chunk of equity in their home that have been kicked to the curb by banks and credit unions for one reason or another. The private mortgage market has always been a vibrant, albeit somewhat obscure, part of the Canadian mortgage lending landscape. While the candidates for these alternative mortgage can often be the severely credit impaired, this has evolved and changed drastically in very recent years however as banks, credit unions, and governments make it increasingly difficult for all kinds of individuals and businesses to access traditional mortgage financing. There are those new to Canada, the newly self-employed, investors and developers and a whole host of other mortgage loan candidates who may have been considered “bankable” only a short time ago that have now been pushed to the sidelines as these traditional lenders search for “insurable” loans, preferring to lend to employees with a guaranteed paycheque and perfect established credit, which are also usually also backed by CMHC or other mortgage insurers. Yes, while the big banks drool over guaranteed mortgages and predictable employee payrolls, they have left a large and widening gap for investors to lend both their registered (ie. RSP/TFSA) or unregistered funds in providing private mortgage alternatives to these borrowers…and reaping the benefits of a much higher interest rates that what traditional financial institutions can offer!
Many of these bank declined borrowers are of course as such for very good reason, and one should be very careful as to who they lend money to. While “bad things happen to good people” everyday, many individuals simply have poor character, low levels of home equity, little income stability, or properties that are not desirable either in location, condition, or both, and these people are NOT candidates for prudent private mortgage financing. Many other borrowers however represent a very acceptable level of risk to lend to for a period of 6 months to 1 year, as they get their affairs in order, fix their credit, accumulate more time in their business or the country, sell their property or any other number of reasons an interim mortgage solution is required. The reasons borrowers seek private capital are extremely varied, and a good mortgage broker or private equity underwriter makes it very important work to clearly understand the reasons and the borrower circumstance, only lending in situations when it makes sense, and is a good risk to the investor(s) they represent. Of course, should the borrower not keep his or her end of the bargain in making those regular mortgage payments on time, the lender in concert with their lawyer will make quick action in realizing on their security which is the mortgage registered against the property, through a court ordered sale or foreclosure, and ideally recovering all their capital and interest. This is the great part of being a prudent secured lender, lend to people that have a demonstrated ability to make the payments, and if they don’t for some unforeseen reason, demand payment and foreclose on the home and get your money back. Rarely do things even go this far and the distraught borrower will normally just sell their home if they can’t afford the payments any longer. This is a primary reason why the private or equity lender has a keen eye for quality marketable properties…they can be sold quickly if they need to be in order to recover the capital.
Most private mortgages are relatively short term, ranging from 6 months to 2 years, and should always have an exit strategy in mind. Many of these borrowers just require a period of time to establish/re-establish themselves before ideally getting back to the “A” side of mortgage lending. Yes, some of these people may have serious credit issues, but most of these will be screened out by a good broker or private mortgage firm, who won’t just lend to anybody. The loan must make sense with a borrower that has a demonstrated ability to make payments and a good amount of equity in the home as evidenced by a full appraisal. Most lenders will not lend more than 75% of the value of the home, and like to see a clear exit strategy to have the loan paid out in a reasonable period of time.
There are a variety of ways to get your money working for you in the private mortgage lending space. From pooled products such as shares in a Mortgage Investment Corporation (MIC) or larger more sophisticated private and syndicated mortgages loans. Having private mortgages as part of your overall investment portfolio should be a strategy to seriously consider. These instruments are not without risk however and can be quite complex, it is there fore imperative that you only deal with a mortgage broker who is specialized in the private lending space, as most mortgage brokers in the marketplace are generalists and not equipped to navigate these transactions on your behalf.
About Alan Fetterly:
Alan is a Certified Financial Planner and licensed Mortgage Broker with over 20 years experience in banking, investments, real estate, and mortgage brokerage. He has worked within major banks and credit unions in both an advisory and management capacity. Alan aims to open opportunity and education in alternative investments, as well as assists a vast array of borrowers with their mortgage financing needs.