Private mortgages soar in popularity, are ripe for investment

by Neil Sharma on 01 Nov 2018

According to a report released this week, private lenders funded 20% of mortgage refinances in the second quarter of this year, highlighting how profitable mortgage investment is becoming.

The joint report between Teranet and Realosophy also revealed that private mortgages during Q2 2018 jumped 67% compared to the same period two years ago. While much of that can be attributed to new mortgage rules, says Laura Martin, COO of Matrix Mortgage Global and director of Private Lending Hub, there’s nary a reason for concern because the quality of private mortgage borrowers has improved dramatically over the last decade.

“The mortgage default rate in Ontario in 2017 was 0.24%,” Martin told CREW. “The mortgage stress test of plus-2% on the contract rate, as mandated by OSFI [Office of the Superintendent of Financial Institutions], has meant a reduction of 20% in purchasing power. High net worth individuals typically have at least 30% of their investments in real estate holdings. They enjoy the liquidity of an investment that matures every year so that they can reinvest, as well as monthly cash flow that is secured on an inherent and tangible value from the real estate asset.”

Private mortgage investors, according to Martin, make 8-10% returns on their investments, even with lower loan-to-value ratios.

“The average private mortgage amount in the GTA for Q1 2018 was $179, 280,” she said. “The typical term of a private second mortgage is 10% interest-only monthly payments, which amounts to $1,494 times 12 months, which equals $17,928, plus the entirety of the principal loan amount back.”

Private mortgage funding has been marred by a few predatory lenders, but according to Zahra Marani, principal of Marani Law, the stigma is dissipating largely because people realize the mortgages are registered against the properties.

Moreover, in light of the Guideline B-20 mortgage rules taking effect at the beginning of the year, the private mortgage space has burgeoned thanks to an expansive clientele.

“Private mortgages are an ideal investment for those who don’t want the responsibility of owning their own property, as well as for those who wish to diversify their portfolios,” said Marani. “Our lender clients are lending to borrowers such as business owners, builders, investors of preconstruction condos, and others, many of whom previously qualified with A and B lenders, and who can still afford the mortgage payments, but no longer qualify with those lenders.”

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