A mortgage is a debt instrument secured by the collateral of a specified real estate property. A private mortgage is a type of mortgage loan whereby funds can be sourced from an individual or corporation rather than borrowing from a bank or other financial provider.

Mortgage investing, otherwise known as private lending or mortgage lending, is a great investment vehicle for those looking to earn generous fixed returns that include monthly cash flow, while also offering security on real estate. When an individual invests in a mortgage, their investment is secured by a title registration on real property and a contract that legally requires the borrower to repay the investment based on a set of specified terms, interest rates and conditions. Mortgage investing is a debt instrument, meaning that you do not own the property you are investing in, but rather, you have a registered lien on that property. Private mortgages enable mutually beneficial scenarios that provide borrowers the ability to leverage their real estate in order to access capital in a convenient way, while also providing investors the ability to lend their funds into investments that are secured on real estate and offer a passive income stream.

A group or syndicated mortgage is when two or more investors collectively lend their capital to fund one specific mortgage. Each investor will hold a proportionate interest of the total mortgage equal to the amount of their investment. This structure is often used when the size of the mortgage amount requested is larger than the amount that one individual may be able to fund alone. Group mortgages are an excellent way to diversify your portfolio and allow for individuals to participate in a mortgage investment of their choice with the possibility of greater diversification options.

• First Mortgage: A mortgage registered in first priority on the subject property.
• Second Mortgage: A mortgage registered in second priority on the subject property behind an existing first mortgage.

Individual Lending is a mortgage investment wherein an individual borrower is looking for first (1st) or second (2nd) mortgage financing. These mortgages are usually for existing properties that include residential, duplexes, triplexes or condominiums, along with commercial or industrial properties. The mortgage may be used to consolidate debt, purchase property, fund a renovation project and/or property improvements, etc.

Project Lending is a mortgage investment that is utilized towards larger scale development and construction of land.

As of July 1, 2018, syndicated mortgage transactions are categorized as either qualified or non-qualified, based on the property being pledged for security and the structure of the debt obligation.

A suitability assessment is required on all mortgage investments that fall within a non-qualified category. Properties that are intended for development and construction as well as industrial, commercial and residential properties that exceed four units, are classified as non-qualified mortgages.

The suitability assessment will look at each investor’s financial standing, risk tolerance, and investment objectives to ensure a suitable alignment between the investor and the investment product. Investors who do not meet the designated class criteria are limited to a maximum investment of $60,000 per 12-month period. Pro Funds Mortgages will review the suitability documents with each investor.

Mortgage investments are legal transactions that involve many moving parts and require flexibility and commitment from the lender. Since mortgage investments are closed terms, they are not eligible for early redemption. Additionally, each investment includes a standard provision extension allowance. We therefore recommend that investors only participate in these investments if their funds are not needed for an alternative investment immediately succeeding the maturity of a mortgage.

Have equity in your home? Reasonably and appropriately leveraging this equity through a home equity line of credit or refinance is a fantastic way to participate in mortgage investing. See our Be The Bank article to learn how you can earn positive net monthly cash flow after paying borrowing costs.

The majority of our mortgage offerings are eligible for investments using registered funds. If you have RRSPs, TFSAs, LIRAs, LRSPs, LIFs, RRIFs or RDSPs that you would like to use towards mortgage lending, you will have to move your funds to an administered plan trustee that will allow the self-direction of your funds into mortgage investments. At this time Pro Funds works exclusively with Community Trust. Contact us to learn more about how Community Trust can work for you.

Mortgage investment returns feature 2 components:

Interest Rate: A fixed rate of interest that is paid to you either on a monthly basis or in advance – your cash flow.

Lender Fee: A fixed fee (based on an annual percentage rate) that is paid to you as a lump sum either at the beginning or end of the term – your bonus.

Interest payments for cash investments will be auto deposited into your bank account of choice each month. If you are investing with registered funds, your interest payments will go directly into your registered funds account.

All interest and lender fees earned through a mortgage transaction are considered investment income. Annually, the mortgage administrator, VALOUR Mortgage Services, will prepare a T5 Slip (Statement of Investment Income Slip) for all investors that have invested with cash funds. Investments using registered funds will not be issued a T5 statement. It is recommended that investors seek independent tax advice on how to best structure their investments.

The level of security or risk in a mortgage investment is largely based on the property that is being pledged as security. Because investors have a registered lien on the subject property they are investing in, in the event that a borrower defaults on a loan or otherwise fails to abide by its terms, a legal mechanism known as a ‘Power of Sale’ is put into place which allows the lender to sell the secured property to pay off the loan. Therefore, when investing in a mortgage, it is important to understand what your loan to value (LTV) ratio is. A loan to value ratio represents the percentage of debt on the property compared to the value of the property. It is very important that the loan to value ratio always has a buffer of equity available so that your investment is protected in the scenario where the sale of the property is required. Additionally, property location, property type, borrower credibility and exit strategies are other important factors that can play a large role in mitigating risk.

In a typical mortgage transaction, there are no direct costs payable by you, the lender, in order to invest in a mortgage. All legal fees, broker fees, etc., are paid for you by the borrower. If you are using registered funds to invest there will be associated fees from the trust company to open an account to transfer your funds into a mortgage investment.

In each mortgage investment, a lawyer will be selected to represent the lender or the group of lenders. Pro Funds Mortgages works with several lawyers who are very experienced and knowledgeable in real estate law and private mortgage transactions. This lawyer will have a fiduciary duty to the investors and in making sure the security features and funding conditions are fulfilled prior to closing the mortgage.

In every mortgage investment, Pro Funds Mortgages and its affiliates will undertake a due diligence review. Each mortgage proposal will be evaluated based on many factors including, but not limited to: 1. An assessment of the borrower (income verification, credit, net worth, etc.), 2. An assessment of the real estate (valuation of the property, type of asset, property location, condition of property, etc.), and 3. Mortgage details (use of funds, exit strategy, loan to value ratio, etc.).

 

For all larger scale land development and construction financing requests, Pro Funds Mortgages has aligned with VALOUR Capital, to undertake an extensive due diligence review, determine project viability and structure strategic financing solutions. These projects will be analyzed by an in-house team of experts including engineers, urban planners, financial analysts, accountants, as well as construction and development managers. The due diligence process encompasses property and project review and assessment, developer review, market analysis, project costing and validation, financial projections and profitability, independent AACI “as is” and “on complete” appraisals, legal review, finance model structuring and project exit. Once this process is completed and a mortgage investment is approved, all relevant due diligence materials will be provided to all interested investors in order to make their own informed decision prior to investing.