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The Private Canadian Mortgage Market

Most Canadians are not familiar with private mortgages.  There is nothing inherently complicated about private mortgages; they are just unfamiliar territory for most of us.  Simply put, the private mortgage market offers an alternative source of financing to borrowers and a high yield investment opportunity for investors.  In today’s market, you can expect an annual yield of 8% to 12% for a moderate level of risk and 13% to 18% for a higher level of risk. 

Why Do Borrowers Require Private Mortgages

There are many reasons why borrowers require private mortgages.

Typical borrowers include those who: are self-employed, wish to consolidate non-mortgage debt, are building their own home or investment property, are buying a cottage, have suffered from poor credit in the past or require access to their home’s equity.  They may have a substantial cash down payment available, but do not meet the stringent underwriting criteria of Canadian banks.  Additionally, they may require funds for investment in their business or investment properties.  Further, borrowers may require private mortgages for the following reasons:

a) Transaction efficiency
Bank mortgages generally take 20 to 30 days to close. Private mortgage transactions can close in as little as 4 to 10 days

b) Short term or bridge financing needed 
Banks generally are not interested in short term or bridge financing no matter what the rate.  For a rate premium, private mortgage lenders/investors will finance these transactions.

c) Borrower wishes to avoid CMHC Insurance Fees / Premiums
CMHC Insurance or default insurance premiums / fees on bank mortgages can be massive.

d) Avoiding expensive prepayment penalties
Borrowers with an existing first mortgage may wish to make renovations and upgrades to their property.  Funding these renovations and upgrades through a refinance of their first mortgage could cost the borrower thousands of dollars in prepayment penalties.  A short-term private second mortgage to finance these renovations and upgrades could save the borrower thousands of dollars.  At a future date, when penalties expire, the borrower could refinance their first and second mortgage into a new first.

e) Debt Consolidation 
In society today, it is easy for credit card debt to get out of hand.  Property owners, who have equity in their home, may wish to consolidate debt at higher rates of interest into a second mortgage at more affordable rates.

f) Borrower may not qualify for traditional bank financing 
Banks generally have a strict protocol they must follow.  For example, many borrowers are self-employed and generate large sums of revenue but show minimal income on their tax return.  Borrowers may also be on a fixed income or asset rich and income poor; accordingly, they do not meet the banks strict debt service ratios.  Bank assessments of borrowers are based heavily on their credit history.  Many borrowers may have a one-time nonrecurring credit problem that can be explained.  Banks will not take relevant explanations into consideration.

g) Property may not qualify for traditional bank financing 
Banks generally shy away from financing commercial and income properties unless they are located in major cities.  Private lenders/investors individually assess these properties and will provide financing if the transaction is deemed secure and within risk tolerance parameters.

About Your Mortgage Investment

Private mortgages help diversify your portfolio into investments secured by real property.  In return for your investment capital, you receive a monthly, fixed income stream made up of interest and / or principal for 6 to 24 month periods.  Most mortgage investments are RRSP eligible; this means your private mortgage investment may be held in a self-directed RRSP.  Mortgages are an ideal investment for your RRSP because they earn interest income in a tax-sheltered environment.

Risk v. Return 

In our humble opinion, there is no other investment vehicle today, that rivals private mortgage investments on a risk verses return basis.  Your private mortgage investment is not eroded by management fees, commissions and is secured by real property.  Further, a mortgage investment’s risk tends to decrease over time, as property values increase and the mortgage principal decreases with each payment. 

How secure is a mortgage investment?

Mortgage investments can be very secure.  There are two main levels of security, the strength of the borrower and the strength of the collateral (property).  Mortgage Cents Inc. collaborates with you to evaluate and underwrite each transaction ensuring it fits within your risk tolerance guidelines.  To assist in decision-making, we provide all investors with an underwriting and disclosure package detailing the proposed private financing transaction.  This disclosure package includes, but is not limited to the:

  • Mortgage application
  • Credit report
  • Property appraisal
  • Borrowers tax filings and financial statements
  • Loan to value & debt service ratios
  • Mortgage interest rate and repayment terms

Once reviewed, a Letter of Intent is forwarded to the borrower outlining the terms of the proposed mortgage transaction.  Should the investor and borrower agree to its terms, a Commitment Letter with relevant conditions to obtaining the said mortgage is prepared, forwarded and signed by the borrower.  A solicitor of your choice will then review the transaction ensuring all conditions are met before funds are released.  Granted a successful review, your solicitor registers the mortgage transaction(s).  

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Past Mortgage Investment Opportunities

If you are interested in making private mortgages work for you and joining the ‘Private Mortgage Investment Bulletin’ email list, contact us below:

Paolo Abate, BBA (Hons.),CPMA, AMP
Director of Mortgage Finance, Mortgage Agent
Phone: 289-371-3300 x 2222
Toll Free: 1-877-244-1422 x. 222
Skype:  paoloabate
Twitter:  paoloabate
Mortgage Agent Licence # M08007277

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