What is a private mortgage?
A private mortgage is essentially the same as a bank mortgage except the lender is a private individual or company. The terms and conditions of private mortgages are similar to that of bank mortgages
Why do borrowers require private mortgages?
There are a number of reasons why borrowers require private mortgages:
Speed of closing the transaction
Bank mortgages generally take 20 to 30 days to close. Private mortgage transactions can close in as little as 4 to 10 days
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.
Borrower wishes to avoid CMHC fees
CMHC fees on bank mortgages can be massive.
Private second mortgage financing to avoid expensive prepayment penalties on a refinance of an existing first mortgage
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 the 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 in prepayment penalties.
Second mortgages for debt consolidations
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 expensive 15% to 18% credit card debt into a second mortgage at 12%.
Borrower may not qualify for traditional bank financing
Private lenders will finance what the banks wonít. Banks generally have a strict protocol they must follow. Bankers may not be allowed leeway for personal judgment and assessment, even if the deal makes sense. 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 so they do not meet the banks strict debt servicing ratios. Bank assessments of borrowers are heavily based on their credit report. Many borrowers may have a one-time nonrecurring credit problem that can be explained. The banks generally will not take this into consideration
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 to be secure.
Why would an individual or business invest in private mortgages?
There are a number of reasons why an individuals or business would invest in private mortgages:
Risk verses Return
In my opinion, there is no other investment vehicle today, that I believe will out-perform private mortgage investments on a risk verses return basis. I feel stocks, bonds, GICís and mutual fund investments pale in comparison to returns accumulated on private mortgage investments. Furthermore, a mortgage investmentís risk may tend to decrease over time, as the property value increases and the mortgage principal decreases, the borrows equity in the property will increase, reducing risk on the mortgage investment.
Typical first mortgages pay between 9% and 13%. Second mortgages pay between 12% and 16%.
Typical high yielding investments do not offer the investor any type of direct control over the investment, for example, when you invest in a companies stock (shares), you are trusting the companies management to look after your investment, your hard earned dollars are placed with individuals you probably have never meet. On any given day you can open the newspaper and find examples of company management who have breached their fiduciary duty to their shareholders. The same can be said for mutual fund investments. Investors in mutual funds generally have no control over the mutual fund managers that are managing their investment. I have seen investors with hundreds of thousands of dollars in mutual funds and they had no knowledge of the background of the funds managers.
Investing in income property does give the investor an element of control over their investment, however the labour content of management of the income property must be weighed against returns. My experience has indicated that when you invest in income property you are in a sense buying a job. Many first time investors in income properties are shocked to discover that the properties do not management themselves. Mortgage investors/lenders work with me for about five hours to initially assess the mortgage investment. Generally after that, their biggest job is to go to the bank to cash their monthly cheque.
Mortgage investors/lenders have complete control over the mortgage transaction, with my support, they can dictate all the terms and conditions that will appear in the mortgage contract. They have the option to inspect (to kick the tires) of any property they are interested in lending on and actually meet and shake hands with the borrower.
Most mortgage investments are RRSP eligible. This means the mortgage investment may be held inside an RRSP.
Unlike variable returns of stocks and mutual funds, mortgage/lenders are provided with a fixed monthly income.
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).
I provide all mortgages investors/lenders with a disclosure package of any prospective borrower they are interested in financing. Mortgage Investor/lenders are provided detailed information on the borrower including:
- Mortgage application
- Credit report
I will also obtain any other information the mortgage investor/lender may request.
The property is appraised.
In the event the borrower stops paying their mortgage payments (default), the mortgage investor/lender can commence legal action.
Mortgage transactions are registered by a solicitor. The mortgage transaction is to be reviewed, in detail by the mortgage/lenderís solicitor before any funds are released.
What is the required investment amount?
The required investment amount depends on the deal. Unlike a mortgage mutual fund, the mortgage investor/lender is financing a specific mortgage deal. I have placed mortgage deals as small as $6,000.00 and as large as $700,000.00.
It is also common for two or more mortgage investors/lenders to join together to finance larger mortgage deals.
What costs and fees are involved?
Generally the mortgage lender/investor pays no costs or fees. The borrower is responsible to pay the appraisal fee, legal fees and mortgage broker fee.
How does it all work?
||I meet the potential mortgage lender/investor to explain the process of private mortgage lending/investing.|
||I present the mortgage lender/investor with a disclosure package on the potential borrower and property. |
||An appraisal is ordered.|
||I prepare a mortgage loan agreement and applicable paperwork for the mortgage lender/investor to sign.|
||All documentation is forwarded to the mortgage lender/investors solicitorís office for review.|
||The mortgage lender/investor issues the funds directly to their solicitorís office who releases these funds after the mortgage deed is registered.|
||The transaction is now complete and the mortgage lender/investor is provided with monthly postdated cheques from the borrower.|
Agent # M08008232
Verico Best Interest Mortgages Inc. #10272