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What You Need to Know Before Investing in Private Mortgages: A First Timer’s Guide

16 August 2023

If you’ve been following the alternative investment landscape recently, you’ve probably read about private mortgages. Once the domain of sophisticated high-net-worth investors and corporations, private mortgages have become more accessible in recent years thanks to the continued growth of alternative lending. If you’re considering private mortgages for your portfolio, it’s important to understand how private lending works, what options are available to you and, crucially, how private mortgages differ from traditional mortgages and real estate investing. 

Private Lending: An Overview

In real estate, private lending refers to short-term mortgage financing primarily for borrowers who don’t qualify for traditional mortgages. These loans are usually provided by mortgage investment corporations and individual private lenders that include investors, conglomerates or high net-worth groups. In a competitive housing market, private lenders play a crucial role in providing liquidity and financing to borrowers who are looking for alternative lending arrangements to those offered by the major banks. 

Canada’s private lending market has expanded rapidly over the past two decades, reflecting growing consumer demand for flexible, alternative mortgage products. According to Statistics Canada, private lenders and other non-bank financial entities account for less than 2% of the mortgage market and their share is much greater in mortgage refinancing transactions. Each quarter, private lenders extend tens of billions of dollars in mortgages to borrowers across Canada. The growth in private lending is expected to continue as traditional lenders impose new restrictions on borrowers in a risk-off environment. 

As an alternative to the major banks, private lenders offer greater flexibility in the mortgage application process, often focusing on the borrower’s equity, cash flow and exit strategy without the stringent stress tests and lending requirements that characterize traditional mortgages. Private mortgages are usually shorter-term loans with higher interest rates and fees than traditional banks, but also provide more customization.  For borrowers, working with a private lender usually entails a simplified approval process, more flexible loan terms and the ability to obtain financing for short-term projects. 

Investing in Private Mortgages

Private mortgages are fixed-income products designed to generate regular, high-yield returns for investors. When you invest in a private mortgage, you are providing the borrower with a mortgage loan that is backed by their property. In exchange, the borrower pays the private lender interest and fees for the duration of the loan term. Becoming a mortgage investor means you are investing in debt as opposed to equity, which entitles you to fixed payments, including interest.

Mortgage investing is not the same as real estate investing because you are not investing in physical property, but in mortgages that are backed by property. However, investing in mortgages offers many of the same benefits as real estate without the risks and responsibilities of property ownership or title transfer. By investing in mortgages and not real estate, you also side-step the risks of negative cash flow, liquidity constraints, vacancies and lapses in market conditions. Also, returns from a mortgage investment are seen immediately and not upon the sale of a property. Overall, when you invest in private mortgages, you gain exposure to the real estate market but without the aforementioned risks that usually accompany physical property ownership.

Private mortgage lenders come in many forms and offer different programs to investors – mainly, they include whole mortgage investment programs and Mortgage Investment Corporations (MICs), which provide exposure to the residential mortgage market at varying risk/return levels. 

Whole mortgage programs are geared toward high-net-worth investors who want to add residential mortgages to enhance their portfolio due to their attractive risk/return profile. These programs are typically administered by mortgage companies that manage the entire investment process on behalf of the investor – including sourcing, underwriting, and managing each mortgage investment throughout its term. Whole mortgage programs save investor’s precious time and eliminate a great deal of risk and uncertainty from the lending process, especially if the investor doesn’t have expert knowledge of the private mortgage market or lacks experience in evaluating borrowers. 

Whole mortgages are suitable for accredited investors with at least $500,000 in liquid capital to deploy. If you live in Ontario or British Columbia, a minimum net worth of $1 million and a net income before taxes of at least $200,000 (or $300,000, when combined with a spouse) is usually required to qualify as a whole mortgage investor. A minimum net worth of $500,000 is preferred for all other provinces. 

Investors who don’t meet the net worth, income and capital requirements can still invest in private mortgages through a mortgage investment corporation, or MIC, which is a pooled fund that invests in private mortgages on behalf of investors. When you invest in a MIC, you invest in a diversified portfolio of mortgages. You become a preferred shareholder that is eligible to receive regular dividend payments in the form of  interest and fees collected from the borrowers. MICs provide diversification benefits and can be part of virtually any investment portfolio, including a TFSA, RRSP, RRIF or RESP. 

Is Mortgage Investing Suitable for You?

Mortgage investments are defensive, cash flow investments  that can be used for portfolio diversification, capital preservation and inflation hedging. They have historically provided higher rates of return than other fixed-income products, such as government bonds and Guaranteed Investment Certificates, and can be incorporated into registered savings and retirement accounts. For these reasons, private mortgages appeal to retirement planners, defensive investors and individuals seeking fixed income portfolio diversification.

If you’re an accredited investor or have a minimum of $500,000 in liquid capital, whole mortgages allow you to invest in a single mortgage or multiple mortgages tailored to your specific requirements and risk tolerance. If you’re looking to allocate a smaller amount to private mortgages, MIC funds offer a portfolio solution with a much lower minimum investment. Established non-bank financial providers typically offer both investment programs backed by a team of experienced mortgage and investment professionals. 

One of the most important decisions you will make as a mortgage investor is selecting the private mortgage investment partner to manage your portfolio. Working with an experienced firm can help you navigate the investment process and identify a program tailored to your specific needs, yield requirements, and risk tolerance. Although mortgage investing is particularly appealing to defensive investors, whole mortgage and MIC portfolios are designed to meet various investment objectives. The most reputable private mortgage lenders have internal due diligence and risk-management processes that carefully evaluate borrowers, balance against expected mortgage yields and manage default exposure. 

The CMI Difference 

Not all mortgage lenders are created equal. If you decide to invest in private mortgages, you should select a trusted partner with a proven track record of due diligence, risk management, and performance. 

CMI Financial Group is one of Canada’s fastest-growing non-bank financial service providers focused exclusively on the mortgage market. In June 2023, after more than a decade of growth, CMI reached $2 billion in lifetime mortgage placements, making it one of the largest private mortgage lenders in Canada. For over a decade, CMI has built industry-leading whole mortgage and MIC portfolios with a proven track record of achieving yield targets and delivering seamless distributions. 

CMI offers a whole mortgage investment program  for high-net-worth investors looking to invest in a single mortgage or multiple mortgages. Our program provides targeted annual returns of 6% to 16% and a suite of customization options, such as requiring that the borrower pays the full year of interest upfront. We provide you with curated private mortgage opportunities tailored to your risk tolerance and investment goals.

For all other investors, CMI offers three industry-leading MIC Funds, which are designed to make mortgage investing easy. You can choose between the CMI MIC Prime Mortgage Fund,, Balanced Mortgage Fund and High Yield Opportunity Fund. 

Get Started with Private Mortgage Investing

Are you interested in becoming a private lender? Would you like to learn more about how private mortgages can supercharge your investment goals? Contact us today and request a free consultation with a CMI Investment Manager. 

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