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Why Invest in Private Mortgages?


The most secured and durable investment is real estate property. History has proven that although real estate prices may have fluctuated from time to time, over the long-term real estate property has appreciated in value. The security for a mortgage is real estate property.

Private mortgages provide a regular income stream, tangible security and a real return to the investor that is superior to bank deposit, GICs and bonds.

The big-chartered banks in Canada have often been criticized for charging exorbitant service charges. However service charges at best probably only cover the overhead costs incurred by the banks in their operations. Their favorite money making venture is undoubtedly the mortgage business.

There are many reasons why these investments are so highly sought after, which include the following:

Low Administration Costs: Each of us who have had a mortgage know how long it takes to pay this debt off. The Banks know this as well. The borrower is required to pay the costs to have the mortgage registered against title to their property. The Bank simply sits back and goes about cashing the monthly payment for years without incurring any further cost whatsoever.

Cash-Flow: A mortgage generates cash each and every month. Obviously the amount of the monthly payment will depend on the size of the mortgage, the interest rate and amortization period. However the payment comes in each month if the borrower does not want to loose their home. The fact is that the mortgage payment will be the last payment not made by someone in financial difficulty, and if bankruptcy occurs, a mortgage holder’s security is not affected by the borrower declaring bankruptcy.

Protected Capital: Perhaps the main reason why Banks love mortgages, and why they fight tooth and nail with each other for this business, is the low risk associated with these investments. Obviously the risk associated with a first mortgage is less than the risk associated with a second mortgage, but than again the return from holding a second mortgage is substantially greater.

For the first several years the mortgage is outstanding, almost all of the payment is applied to interest. The capital is protected by the value of the real estate against which the mortgage is registered, and the value of the mortgage is not affected by the ups and downs of the stock market.

RRSP mortgages give attractive returns secured by a first or second mortgage on a Real Property in Canada. At a rate of 10% yield rate of return, your RRSP portfolio should double in value every 7 years according to the rule of 72. Private mortgages can be a great investment, since there is great security with the equity on real property. Even if a debtor reneges, the property can be used to help pay off the mortgage.

It is also an easy investment to make - private mortgages require little baby-sitting or watching of an investment. Money is paid regularly and the lender is fully covered by the legal documents signed at the time of the mortgage, ensuring that the investment as well as a profit is collected.

Since private mortgages are so good for investors, many think that they do not offer a great deal for property owners, but this is not always the case. Property owners turn to private mortgages for many reasons. Not all private mortgages are high interest - some do offer good rates. In some cases, property owners turn to private mortgages if they simply are a very poor credit risk and cannot get financing elsewhere - and then switch to a non-private mortgage with better rates as one’s financial status improves. Finally, there are usually no greater risks with private mortgages than with other types - the same legal documents are used to protect the lender.

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When considering a real estate investment, due diligence is crucial to ensure that you make an informed decision. This involves gathering as much information as possible about the property, its financial performance, market conditions, and management.