Private mortgage lending is a very popular way for people with money (lenders) to generate a solid return on their funds, and for people in need of money (borrowers) to acquire funds they are otherwise unable to receive from a financial institution. 

 

At Canadian Investment Services, we often use this strategy with clients who are in search of capital in order to make additional real estate purchases, which usually allows the lender to secure their loan against a real estate asset. 

 

In this article, I will provide an overview of the Private Mortgage Lending process from both the borrower and lender perspective to give you insight into how we use this strategy as an investment opportunity for our clients.

 

Let’s start by looking at the different borrowing options available. There are 3 main mortgage lending categories to consider when aiming to secure a mortgage:

 

  • Banks 

Banks can provide a very low interest rate, and for this reason securing a mortgage with a bank is normally the best choice if you are looking for a mortgage to purchase your principal residence. However, banks have strict requirements which can make it very difficult to qualify for these enticing mortgage rates. Also, they will often only provide these rates for your principal residence, so those purchasing additional real estate usually have to look elsewhere.

 

  • Alternative lenders 

Alternative lenders are essentially any mortgage provider that is not a bank, such as Freedom Capital Inc. These institutions provide a middle ground between banks and private lenders. The interest rates they offer are usually higher than those provided by a bank, but lower than those normally seen in the private lending space. It is easier to qualify with an alternative lender than with a traditional bank, however it is more difficult than if you were simply borrowing from a private lender. 

 

  • Private lenders

Private lending usually involves borrowing money from an individual who is not associated with a bank or a mortgage provider. This option can provide you with a higher interest rate and the requirements to qualify are far less strict and easily accessible. For this reason, private lending is a very appealing option for people who do not qualify for a mortgage from traditional lenders (be it due to owning multiple properties or a variety of other factors).

 

From the lender’s perspective, this can be a very beneficial investment opportunity for those looking for the best way to generate a reliable return on a large sum of money. It is also beneficial for those with money tied up in their RRSPs/pension account. This is a well kept secret by the financial industry, but you can actually hold a mortgage in your RRSPs/pension account.

 

There is also the enticing option of borrowing money from yourself if you have money tied up in your RRSPs/pension account, or even in your corporation. I won’t dive too deep into this option here as I will devote an entire article to it soon. 

 

Private Mortgage Lending with CIS

At CIS, we facilitate private mortgages between our clients in need of money and our clients in need of a solid investment option. Most of the time, our clients who borrow money through a private mortgage do so in order to purchase real estate. In many cases, these real estate properties are purchased for the purpose of renovation and resale. 

 

In these situations, it can be very difficult to get approved for a mortgage from a traditional lender. Therefore, we help facilitate short-term (usually one year), and interest-only private mortgages for these clients. 

 

How it works

Commonly, the lender will register a mortgage against a property which guarantees the repayment of the loan upon the sale of the property. Borrowers will receive a mortgage from a traditional lender (i.e. a bank) which sometimes accumulates to less than the required amount, so they still require additional funds which they access through a private mortgage. 

 

We use the loan-to-value ratio on the property to help our lenders find a level of risk that they are comfortable with for these private mortgages. The higher the loan-to-value ratio, the more risk for the lender. Usually, a loan-to-value ratio of 80% or lower is very safe (loaning up to $450k for a $550k house, for example). 

 

While registering private mortgages against a property provides additional security, it also involves substantial lawyer fees and a lot of paperwork. An alternative option that we have found success with is creating a promissory note from the borrower to the lender, which cuts out the lawyers and reduces your costs. This option provides more risk for the lender, so it is only feasible if there is a high level of trust between all parties involved. 

 

Why choose CIS

At CIS, we pride ourselves on helping our clients by pairing investors looking to lend money with a trustworthy party ready to borrow the money at an agreeable interest rate. 

 

We usually facilitate private mortgages with a one year term, and it can therefore be looked at as a fantastic one year investment option. Indeed, it is very difficult to find other one year investment options with this kind of guaranteed rate of return. 

 

Of course, we will adjust the terms of any of these agreements in order to find an option that best suits both parties. These mortgages can include an option for renegotiation after the one year period, or the option to pay out the remainder of the mortgage before that date. 

 

As mentioned above, these will usually be interest-only mortgages, so borrowers will only be required to pay interest throughout the term of the mortgage, and pay the principal in a lump sum at the conclusion of the term. 

 

This arrangement works perfectly for clients who are borrowing the money for real estate investment/renovation purposes: it allows them to maintain lower expenses through the process of the renovation, and gives them the opportunity to pay back the principal upon the resale of their renovation property – an option that they would certainly not have access to through any traditional mortgage process.

 

Of course, the key to successful private mortgage lending is finding the right match between someone looking to lend money and a suitable applicant looking to borrow. Finding this ideal match is one of our specialties at CIS, and can result in great benefits for both parties. It has allowed our clients interested in real estate investing to secure a mortgage on additional properties they would not otherwise get approved for, and it allows lenders to see a generous and stable rate of return for a large sum investment. 

 

I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.

 

Until the next time,

 

Gerry J. Hogenhout, CPA, CGA, CFP, AMP