When a consumer goes to a big bank to obtain their mortgage, that lender can feel more secure in providing that loan because often they are backed by the federal government. Through CMHC mortgage insurance, should the consumer default on the loan, the government steps in and reimburses the bank for any monies lost. When that mortgage is taken away from a big bank though, and turned over to a private investor, that insurance policy is no longer available. It’s this that has gotten a lot of attention in the news lately, with it being cited as the biggest risk that comes with private mortgage investment. But should you really be all that worried?
The simple answer is ‘no.’ It is true that when investing in a private mortgage, there is no way for the federal government to guarantee those loans the same way they would had the loan been provided for by a big bank. This is because in order for a loan to be guaranteed by the government, a borrower must have a 20 per cent down payment, and also pass through a number of other restrictions and requirements. None of these restrictions are placed on private mortgages, which is one reason why they’re so attractive to investors and borrowers alike. But it is because of this that no private mortgage will ever be backed by the federal government.
So why shouldn’t this worry you as a private mortgage investor?
Firstly, because the government won’t guarantee any kind of investment you’re making, unless maybe it’s an RRSP. But however you’re putting your money into the real estate market, or how you decide to throw it around on the stock market, the government will never give you your money back should you lose it.
Secondly, even without a government guarantee, investing in a private mortgage is still one of the best, and most secure, investments you could make. Unlike the stock market, or a home you own but sits empty waiting for potential renters, a private mortgage investment is backed by the property sitting on the mortgage. The only way you’ll lose your investment is if the borrower defaults on their payments; and in that case you’ll be able to claim the property as your own – thereby protecting your investment. So the government doesn’t have to.