|What are private mortgages?
Private mortgages are mortgages where the funds lent to an individual do not come from an institutional source such as a bank, credit union or trust company. Instead the funds come from private individuals such as you. If you have money available in your savings account, RRSP, holding company or Family Trust you could use these funds to invest in mortgages at an above average yield.
Who do we lend private money to?
Private money can be lent to anybody that owns real estate. We mainly lend money to individuals having a more difficult time getting approvals from their bank due to insufficient income, deficient credit, substandard locations, and other problems. We lend mortgages as either first mortgage or second mortgages.
How does it work?
I have many contacts with the mortgage market. Individuals or their own mortgage broker representatives call me because I am known in the industry as a source of private funds. They present me with an application no different than if they were going to a bank. I analyze their requirement and make a decision of whether to approve their request or not. I quote them and interest rate and other terms and conditions; again no different then from a bank. However, because we are lending to individuals with deficiencies it is important to look at the risk factors.
I then call my investors to see who has money available and whether they are wiling to lend on the application. If you are interested I will provide you with the particulars of f the mortgage application and I will use my experience and knowledge to help you make a decision. I will go through the risks and positive aspects of the borrowers. Ultimately you make the final approval. Once you sign the approval document and al other conditions are satisfied the money you want invested is placed in a lawyers trust account a mortgage is then resisted at the land title office in your name (or your RRSP, Holding company etc.). You hold the title to the mortgage and it is your asset. The borrower will then make monthly payments to your account usually by way of post dated cheques or pre-authorized debits form the bank account.
What are the risks?
All investments have risks. Private mortgages should average you higher rates of return than your bank investments. As in all investments risks must be calculated. Your primary security comes from the equity and value in the real estate. If the loan to vale ratio is too high then the risk is higher. If the loan to vale of the mortgage relative to the house value is low then the risk is significantly less.
Mortgage Investment Corporations ( MIC’s)
A new aspect of investing that I am working on involves the pooling of mortgage funds. This is done through a Mortgage Investment Corporation (MIC). It is similar to a mutual fund but only holds mortgages as investments. Risk is mitigated by the pooling of funds and administration is done though Mortgage Network of Canada Ltd. Please call me to discuss this new investment initiative.