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How To Invest In Private Mortgages In Canada

By Jason Anbara | Posted on March 14, 2024

Couple investing in a private mortgage in Canada.

As an investor, it’s essential to explore various avenues to diversify your portfolio. With the help of a financial advisor, you may choose to place funds in stocks and bonds, growing your investments over a significant period. Another lucrative option is private mortgage investing, which offers a unique opportunity to participate in the real estate market while providing vital support to borrowers. 

While it’s possible to pursue this avenue of investing on your own, mortgage investments are best handled by professionals who can manage the process effectively. In this blog, we’ll delve into the intricacies of how to invest in mortgages, highlighting benefits, risks, available options, and steps to get started in Canada.

What Is Mortgage Investing?

Mortgage investing involves providing financing to borrowers secured by real estate assets. Instead of traditional banks, private individuals or institutions lend money directly to borrowers who may not qualify for conventional mortgage loans due to various reasons such as credit history, income instability, or property type. In return for providing these funds, investors make money on these mortgages via the interest accrued from payments.

Benefits of Private Mortgage Investing

Many of the benefits of mortgage investments are similar to those of other investments, including impressive portfolio diversification. However, there are also more nuanced advantages that make investing in mortgages a good idea:

  • Diversification: Adding mortgage investments to a portfolio can spread risk more evenly by incorporating exposure to different asset classes, thus enhancing the portfolio’s resilience.
  • Secured by Real Estate: Private mortgages are typically secured by tangible assets, such as residential or commercial properties, providing a level of security for investors.
  • Steady Income: Investors receive regular interest payments, providing a reliable source of income and potentially mitigating the impact of market fluctuations.
  • Tailored Investment Options: Private mortgage investments offer flexibility in terms of loan terms, borrower profiles, and property types, allowing investors to tailor their investments to their risk tolerance and investment objectives.

Risks of Private Mortgage Investing

While there are risks associated with private mortgage investing, working with professionals, including mortgage brokers and administrators, can help reduce the potential for drawbacks.

  • Default Risk: There is a risk that borrowers may default on their loan obligations, leading to potential losses for investors.
  • Market Risk: Fluctuations in the real estate market or economic conditions may impact the value of the underlying collateral, affecting the recoverability of invested capital.
  • Liquidity Risk: Unlike publicly traded securities, private mortgage investments may lack liquidity, making it challenging to sell or exit investments quickly.
  • Interest Rate Risk: Changes in interest rates can affect the attractiveness of mortgage investments, potentially impacting the value of existing investments.

Financial advisor explaining private mortgage investments in Canada.

Private Mortgage Options

Now that you understand a bit more about how investors make money on mortgages, you might be curious about the options available for these kinds of investments. There are several choices available, each with its own process and level of control:

Mortgage Administrations

Mortgage administrators act as intermediaries between investors and borrowers, facilitating the origination, servicing, and administration of mortgage loans. For investors, these administrators offer access to a curated selection of mortgage opportunities that have been pre-vetted, aligning with the investor’s preferences and investment goals.  Finally, the mortgage administrator will handle all aspects of loan management, from underwriting to collections.

In Ontario, these entities are regulated and licensed by the Financial Services Regulatory Authority of Ontario (FSRA). This ensures compliance and reduces the risk of fraud, protecting individuals on both sides of this loan. 

Lend Directly

Investors have the option to lend directly to borrowers, affording them the opportunity to negotiate loan terms and secure collateral on their own. While this approach offers the greatest amount of control over investment decisions, it’s not always the best option. As a private mortgage lender investing directly, you will not need to be licensed in the way a mortgage administrator is, but you should consider the time investment required to conduct extensive due diligence and ongoing management.

Mortgage Investment Corporation (MIC)

MICs are publicly traded entities that invest in a diversified portfolio of mortgages. Investors can purchase shares of MICs, allowing them to invest indirectly in a pool of mortgage loans managed by professional fund managers. Keep in mind that due to the nature of this process, administrative fees tend to be higher and can take away from investors’ ROI. In addition, liquidity mismatches are possible if investors are looking to exit quickly; the MIC may not have the funds on hand to pay shareholders.

Mortgage Syndication Fund

Mortgage syndication funds aggregate capital from multiple investors to fund real estate projects or mortgage loans. These funds are managed by experienced real estate professionals, offering investors the opportunity to participate in larger-scale investments. 

Bear in mind that repayments may take longer depending on the involvement of other shareholders, including banks. In addition, these mortgage investments are not backed by the provincial government in Ontario, increasing the potential for risk on your initial investment.

Steps to Invest in Private Mortgages in Canada

It is recommended that you do your own research to uncover the right mortgage investment strategy for you. Regardless of your initial understanding, keep in mind that investing in private mortgages in Canada should be straightforward. For example, if you decide to work with a mortgage administrator, here’s how the process works:

Step 1: Connect With a Mortgage Administrator

Initiate the process by identifying and connecting with a reputable mortgage administrator known for their expertise in underwriting, risk management, and loan servicing. This professional will be instrumental in helping you navigate the intricacies of mortgage investing. Ask plenty of questions to deepen your understanding and build trust with these professionals.

Step 2: Register

In order to register with the chosen mortgage administrator, it’s necessary to provide various documentation and complete any required forms or agreements. Once again, ensure you ask questions if any terms and conditions are unclear.

Step 3: Choose Your Investment

Work closely with the mortgage administrator to select investment opportunities that align with your investment objectives and risk tolerance. Consider factors such as loan-to-value ratio, borrower creditworthiness, and property location. Your mortgage administrator should provide helpful information and advice regarding which options best suit your goals.

Step 4: Transfer Funds

Once you’ve chosen your investments, transfer the necessary funds to the designated account managed by the mortgage administrator. Consider that some administrators require a high minimum investment amount, while others may be more flexible regarding principal funds. Ensure you are aware of these amounts before transferring.

Step 5: Receive Interest Payments

Sit back and enjoy regular interest payments from your mortgage investments. Mortgage administrators handle all aspects of loan servicing, including collecting borrower payments and distributing interest to investors. Some administrators may deposit these funds in a lump sum or over the course of a specified period. These details will be available in your agreement.

Step 6: Receive Initial Capital Investment

Upon maturity or repayment of the mortgage loan, investors receive their initial capital investment, potentially with accrued interest, depending on the terms of the loan. If you would like to continue your mortgage investment, ensure you consult with the administrator and discuss pertinent information regarding updated objectives.

Secured Mortgage Investments

Investing in private mortgages in Canada offers a compelling opportunity for investors seeking portfolio diversification. By partnering with a reputable mortgage administrator, investors can access a curated selection of mortgage opportunities while benefiting from professional expertise and risk management. With careful due diligence and prudent investment decisions, private mortgage investments can play a valuable role in achieving your financial goals.

For more information and personalized guidance, don’t hesitate to reach out to NorthLend Financial today.

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About Our Founder

Jason Anbara, Founder, CEO, and Principal Mortgage Broker, has been dedicated to realizing the homeownership dreams of countless clients through his mortgage services business. A distinguished graduate in International Management with Honours, Jason also holds a Bachelor of Commerce from The Telfer School of Management at the University of Ottawa.

Driven by a passion for his community and the positive influence his team has on both new and existing residents, Jason has garnered multiple accolades and awards. These recognitions underscore his unwavering commitment to providing exceptional customer service.

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