Private Mortgage Investing – YOU become the Bank!

Private Mortgage Investing – YOU become the Bank!

Mortgages represent one of most common investments in the world – by banks and institutional lenders. Banks like mortgage investing for the same reasons that you probably will. Good return on investment. Relatively lower risk than many alternatives.

Of course, there are many different types of mortgages but here we are only going to discuss residential first and second mortgages placed against real estate in Western Canada.

Generally, most private mortgages are considered “equity” mortgages, which basically mean that they lean more on the value of the real estate than on the general credit worthiness of the borrower

When referring to a “first” or a “second” mortgage what we are referring to is the date of registration of the mortgage relative to any other mortgage placed on the property. Priority of a mortgage, at law, relates to the order in which mortgages are registered. So if I refer to a first mortgage, installment loans in Idaho it means that no other mortgage is to be registered on title in priority to your mortgage. If I refer to a “second” mortgage I am referring to a mortgage that is to be registered behind a previously existing mortgage. A majority of private investments in mortgages are in “second” position and are called “Second” mortgages.

However, the better the credit score of the borrower, employment history, and the borrower’s cash flow position, the lower the interest rate will be, subject to the mortgage investment marketplace and the Loan to Value of the mortgage investment. Typically second mortgage interest rates currently range from a low of 9% to a high of 18%, depending on a number of factors that are balanced by a mortgage broker when he quotes a rate to a borrower. The rate the mortgage broker will present will be a market-based rate based on the lowest rate likely to be acquired by an investor.

Another will place a mortgage on a property located in a declining marketplace outside of urban MB, to a loan to value of 65%, at an interest rate of 14% to someone with bruised credit

For example, one of our lenders will place a second mortgage on property located in Calgary, with a Loan-To-Value of 75%, to someone with good credit, at 8% per year.

So a significant part of the mortgage broker’s work is to determine what rate of interest will attract investment by an investor, and still be within the generally market rates otherwise available to the borrowers. Before I propose a mortgage investment I will have priced the investment based on market conditions, taking into account various risk factors that affect the cost of the money to the borrower and the rate of return to the investor.

More experienced investors may choose higher risk mortgages, as the investor has had more background in handling an occasional NSF cheque, or isn’t concerned about perhaps having to foreclose on the property to recover their investment. Their desire for a higher rate of return balances the higher risks involved.

The difference in the level of risk between most second mortgages does not mean that there is a significant risk of losing all your money. Rather, higher interest mortgages generally reflect the possibility that you will have to collect your payments actively, or even engage lawyers and extra expense to recover your investment dollars and/or your payments. As long as the investment in a mortgage is made with reasonable parameters there is little or no risk of losing all your money, but you might have to wait to get paid at the higher risk levels.

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