Alan Fetterly, CFP
In today’s current tight credit environment, there are many borrowers, with good quality marketable properties, and a good chunk of equity in their home that have been kicked to the curb by banks and credit unions for one reason or another.
The private mortgage market has always been a vibrant, albeit somewhat obscure, part of the Canadian mortgage lending landscape. While the candidates for these alternative mortgage can often be the severely credit impaired, this has evolved and changed drastically in very recent years as banks, credit unions, and governments make it increasingly difficult for all kinds of individuals and businesses to access traditional mortgage financing. Immigrants, the newly self-employed, investors, developers and other mortgage candidates who may have been considered “bankable” only a short time ago have now been pushed to the sidelines as lenders prefer lending to employees with a guaranteed paycheque and established credit, who are also backed by CMHC or other mortgage insurers.
While the big banks drool over guaranteed mortgages, they have left a widening gap for investors to lend both their registered (ie. RSP/TFSA) or unregistered funds in providing private mortgage alternatives to these borrowers…and reaping the benefits of much higher interest rates!
Many of these borrowers are, of course, declined by banks for very good reason, and one should be very careful as to who one lends money to. While "bad things happen to good people" every day, some individuals simply have poor character, low levels of home equity, little income stability, or properties that are not desirable. These people are NOT candidates for prudent private mortgage financing. Many other borrowers, however, represent a very acceptable level of risk as they get their affairs in order. The reasons borrowers seek private capital are extremely varied, and a good mortgage broker or private equity underwriter needs to clearly understand the borrower’s circumstances, and only lend in situations when it makes sense.
Of course, should the borrower not keep his or her end of the, the lender can take quick action in realizing on their security, which is the mortgage registered against the property, through a court ordered sale or foreclosure, and ideally recovering all their capital and interest. This is the great part of being a prudent secured lender; lend to people that have a demonstrated ability to make the payments, and if they don’t, you can foreclose on the home and get your money back. Rarely do things even go this far, and the borrower will normally just sell their home if they can’t afford the payments any longer. This is a primary reason why the private or equity lender has a keen eye for quality marketable properties; they can be sold quickly in order to recover the capital.
Most private mortgages are relatively short term, ranging from six months to two years, and should always have an exit strategy in mind. Many of these borrowers just require a period of time to establish/re-establish themselves before ideally getting back to the “A” side of mortgage lending. Yes, some of these people may have serious credit issues, but most of these will be screened out by a good broker or private mortgage firm, who won’t just lend to anybody. The borrower should have a demonstrated ability to make payments and a good amount of equity in the home as evidenced by a full appraisal. Most lenders will not lend more than 75% of the value of the home, and like to see a clear exit strategy to have the loan paid out in a reasonable period of time.
There are a variety of ways to get your money working for you in the private mortgage lending space. From pooled products such as shares in a Mortgage Investment Corporation (MIC) or larger, more sophisticated syndicated mortgages, having private mortgages as part of your overall investment portfolio is worth considering. These instruments are not without risk, however, and can be quite complex, so it’s important to deal with a mortgage broker who specializes in the private lending space, as most mortgage brokers in the marketplace are generalists and not equipped to navigate these transactions on your behalf.
Alan Fetterly is a mortgage broker, and Certified Financial Planner (CFP), Alan works with both borrowers and investors in arranging private and syndicated mortgage transactions, in addition to traditional mortgage products. Alan has over 20 years experience in many aspects of the financial industry. 250-460-2986, alan@alfettmortgage.com, www.alfettmortgage.com