Private Mortgages in Ontario – The Investor’s Frequently Asked Questions

So you are one of the bright few Canadians who are looking to take control of your retirement and not leave it in the hands of a fund manager or your bank. The alternatives look appealing however you need to have a lot of questions answered before making a foray into anything new. You are not alone. The world of asset backed investing and more specifically funding private mortgages can be a lucrative one. Here are some of the most common questions I receive and their corresponding answers.

Why Invest In Private Mortgages?

Because the world has changed. More pointedly – the financial world – the days of Sir John Templeton and client first financial planning have expired. There are so many reasons why your mutual fund is being mismanaged that I would need another post just to scrape the surface. So what are the alternatives? Well one that my investors have had great success with has been the direct investment of their liquid reserves or registered funds in Private Mortgages. This is where your money goes to assist in turning around another Canadian home owner’s unfortunate circumstances and gives them a second chance to get their financial house back in order.

What Kind Of Interest Can You Earn?

The returns that are available through mortgage investment are variable dependent on the position of the mortgage (1st, 2nd, 3rd etc.), the location of the property (urban vs. rural), the type of property (cookie cutter subdivision vs. unique or special use), and the borrower’s application strength. The last entails their credit history, employment status, and a general ability to repay the loan. The range of return is anywhere from 5-15% simple interest with applicable fees to the investor dependent on the risk associated with the file.

How Long Are Terms Typically?

I tend to approach the question of how long a term based on the reasonable amount of time it should take to turn around the negative situation that has gotten the borrower into a position where they would need to access private funds. If it took the borrower two years to get themselves into a place where their credit was bruised – they will generally need another two to remedy the damage already done. There are exceptions here when we complete an assessment of their credit bureau and through this process we find immediate improvement by implementing the positive changes that will cause the timeline to shorten. With 2nd mortgages – the term is usually one year with an option to renew at the sole discretion of the lender in order to ensure that the borrowers are reminded that this is not a permanent solution to their financial problem.

What Does It Cost To Set Up?

As with any mortgage transaction – there are costs involved with arranging the loan and making changes to the title of a property. With private mortgages this is not an exception but the rule. As there are professionals involved in the process (Lender, Mortgage Broker, Appraiser, Lawyer etc.) – there is also a bill at the end of the day. The good news for a mortgage investor is that these costs are never yours to pay. The borrower is responsible for all the costs associated with the loan. The actual dollar amounts vary by the amount of loan and the risk associated with the file. The bottom line here is that any and all costs involved with setting up the loan are disclosed to the borrower before they choose to commit to a course of action.

How Much Do You Need To Invest At A Time?

As with any investment – you do not want to put all your eggs in one basket. The same goes for investment in private mortgages. That being said – there are those who find that this is their area of expertise over the years and will put more of their portfolio’s weighting here than other investment categories. The minimum amount that I would recommend to my investors would be 25K but there are exceptions where even as little as 10K will meet the borrower’s needs. The more important question is how will you allocate your invest able funds. If you have for example 100K – I would always recommend to spread this over 3-4 mortgages in a diversified geographic area to mitigate risk.

How Safe Is This Kind Of Investment?

As with any investment – there is always a relative risk associated with the investment. With private mortgages – there are a number of ways that we work together to reduce the risk and ensure you are making a good return on your hard earned money. First of all, the loan is secured by the borrower’s home and your interest is registered on title so you have sound protection in place to ensure your principle is safe. Next, we will always ensure that we only loan to a level of the value of the home that you are comfortable. This ensures that in case the real estate market softens and the property’s value is reduced – that there is still equity in the home to cover your principle amount. And lastly, my investors take comfort in the fact that Canadians repay their mortgages approximately 97% of the time – on time. We as a country will let the lights go out in our house before letting the mortgage get behind. This fact makes it likely that you will earn a good return on your investment.

I’m In Toronto – Where In Ontario Can I Lend Into Mortgages?

The beautiful thing about lending into private mortgages is that there are no geographical limitations. This means that someone who has lived in Toronto their whole life and has never stepped foot outside the city limits is completely capable of lending on a property in Newmarket Ontario. The more important factor in where to lend your money is whether or not the property is located in a marketable area. This will ensure that in a worst case scenario – if the property was to have to be sold to get your principle back – that it could be accomplished in a reasonable amount of time. It should be obvious that this would be more difficult in Timmins than in Thornhill due to the demand in the resale market.

I understand that there is a learning curve involved with any new investment avenue. My role is to assist you in getting your specific questions answered. Please take the time to invest in yourself and get those questions answered below or contact me and we can get you earning more today.