Investors looking at making passive income while diversifying their portfolio would be well-advised to consider investing in mortgages. The rules and regulations around mortgages are tighter today than in decades, and borrowers are more open to working with private lenders or arranging alternative financing to buy their dream homes.
Investing in mortgages is essentially a synonym for private mortgages. They’re the same thing. A private mortgage is funded by a private individual or group of private investors and not a traditional financial institution, such as a bank.
Investing in private mortgages can be highly lucrative as you become the lender to the borrower. Here is a detailed guide to investing in mortgages in Canada.
How Private Mortgages Are Typically Used
Private mortgages are legal and widely used to secure financing for residential, commercial, and industrial properties. In many cases, private mortgages are a lot more short-term in design, typically lasting from six months to up to three years.
Investing in Mortgages Is Passive Income
There is no managing or monitoring your investment. It’s not a stock or an asset that will change its characteristics. A private mortgage makes passive income payments for you every month without effort.
Receive a High Rate of Return
Investing in a private mortgage will likely net you a higher return than stocks, bonds, GICs, or traditional investments.
You Can Charge a Higher Interest Rate
The interest rate is higher on a private mortgage than on traditional mortgages due to the perceived elevated risk of lending to a borrower who may not qualify for traditional financing. Depending on your preferences, you may be able to charge a higher interest rate on some mortgages.
Due Diligence Is Required
The best advice to give in any guide to investing in mortgages in Canada is to perform your due diligence. This pertains to the borrower, the property, and the investment. Review the borrower’s credit background, income and employment, and have your property appraisal. As you are the lender, you assume all the risk.
Risks of Investing in Mortgages
There are obvious risks to investing in private mortgages. The borrower could default. Property devaluation. Interest rates change. Understand and assess these risks before you decide to go ahead with an investment. Any could eat into your profit margins.
Secured Investment with Collateral
Even with the risk that a borrower may not pay off their private mortgage, the real estate secures the investments and acts as collateral for the loan. This makes investing in mortgages highly secure, with the possibility of you taking possession of the property and selling it later to recover whatever of your investment could be lost if the borrower defaults.
Ways to Invest in Mortgages: Direct Investments
There are multiple ways to invest in a mortgage in Canada. The first is to lend directly to the borrower, providing the funds for the mortgage. This, however, requires significant capital and due diligence to ensure everything is legally binding.
Ways to Invest in Mortgages: Mortgage Syndicates
A mortgage syndicate is a group of investors joining to fund a single private mortgage. This allows you to add your money together with others and share the investment risk between you. Every investor in a syndicate receives a proportionate share of the interest payments and principal repayments from the borrower until the mortgage is paid off.
Ways to Invest in Mortgages: MICs
Mortgage Investment Corporations, or MICs, will pool funds from multiple investors and then lend out private mortgages on behalf of the corporation. By investing in a MIC, an investor diversifies their portfolio even more, spreading out indirect investments in private mortgages that they do not even need to manage. MICs typically issue dividends to investors as a means of reward and compensation.
Ways to Invest in Mortgages: REIT
Real Estate Investment Trusts, or REITs, are investment assets that invest in private mortgages as a part of their portfolio. You aren’t directly investing in private mortgages by investing in a REIT. You are, however, gaining exposure to private mortgage investing indirectly without the risk of investing directly in individual loans.
Diversify When You Invest in Mortgages
Minimize risk at every opportunity. Unless you’re a multi-millionaire willing to risk it all, the best way to invest in mortgages is probably through a mortgage syndicate or MIC. This way, you’re exposed to the minimal risk possible.
Ask a Professional for Guidance
Investing in mortgages is a new area for a lot of investors. If you want some added peace of mind or have questions, consider talking to a mortgage broker, financial advisor, or real estate lawyer with experience in private mortgage investments.