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Should You Invest in First or Second Mortgages?

21 December 2012

If you’re new to the world of MICs, or you’re a pretty seasoned investor but you’ve only dealt with investing in first mortgages, you may be wondering if it’s worth it to make the move to putting your money into second mortgages. This is an option that many MICs offer, and whether or not you jump into them will be a matter of personal choice and your own appetite for risk.

Second mortgages are always riskier for the lender and so, the risk will also be greater to anyone that’s investing in them. These mortgages carry more risk because they sit in the second lien position to any first mortgage that’s on the property. Therefore, should the borrower default on the mortgage, the first mortgage will need to be paid first before the lender of the second mortgage gets their money returned.

MICs typically do a very careful and thorough qualification process on all of their applicants to ensure that there is very little risk to their clients. Even those that are borrowing through second mortgages. Still, very investors that want a better guarantee, first mortgages are typically the way to go.

So why would anyone choose to invest in a second mortgage?

Because just as with any type of investment, the bigger the risk the bigger the reward. First mortgages typically will see a return of about 6 – 8 per cent, depending on the MIC. But second mortgages can get you a much bigger return, as high as 10 – 12 per cent. This is because  the return you’re getting is based on the interest rate of the mortgage; and the rates on those second mortgages are considerably higher than what you’ll find with first mortgages. And you’ll be the one that reaps those rewards!

Investing in first or second mortgages is one of the biggest questions that investors have when they choose to dive into MICs. Your choice will largely depend on how big of a risk you want to take, and how big of a return you want to receive. If you work with a qualified and experienced MIC though, you shouldn’t have that much concern about the type of mortgage you’ll be investing in because all of their borrowers will be fully qualified and capable of paying back their loans.

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