Key Facts About Investing in Syndicated Mortgages
Even though syndicated mortgages might sound like some exotic investment vehicle, the truth is that they are just another way to borrow and lend money…and bring in interest as an investor. Let’s take a look at some facts that people new to this market may not know.
Yes, syndicated mortgages are loans too.
Just like any other mortgage, the person taking one out agrees to pay a lender back over time. The difference is that a syndicated mortgage has multiple lenders or investors providing the funding. A mortgage is one of the more solid investments because the borrower has a contractual duty to pay back the amount owed, with interest. Investing in mutual funds, stocks and other securities comes with no such guarantee.
That doesn’t mean that risk is not involved.
Any investment beyond deposits in a government-insured savings account carries risk. That’s why the interest rates that those accounts pay are always the lowest. The more risk that an investment carries, the higher interest rate the investor can expect. If you buy into a mutual fund, you’re hoping that the return will be as high as 10 or 12 percent – if not higher – because there is the risk that you could lose your whole investment if the value tanks.
With a syndicated mortgage, the borrower could still default, so you could lose your money. In a mortgage, there is collateral involved – if you’ve invested in a residential mortgage, the borrower would have his home foreclosed and sold. In the meantime, though, you wouldn’t be getting any payments, and it’s likely that the home will be sold for less than the amount owed, so you wouldn’t get all of your money back. So while you’re extremely unlikely to end up with nothing, you could get a lot less than you expect. Mortgages do have a lot more security than investing in the stock market does, but you still need to know that there is risk.
You do have the protection of provincial regulations.
Each province in Canada regulates provincial regulations. For example, in Ontario, it’s the MBLAA (Mortgage Brokers, Lenders and Administrators Act) that governs them. The Financial Services Commission of Ontario (FSCO) carries out enforcement of the law, and anyone providing syndicated mortgages in the province must have licensure as a mortgage broker or agent.
You need to research the property before you invest.
Take a look at the loan-to-value (LTV) ratio of a mortgage before you invest. If the LTV ratio is 90%, that means the borrower is only putting down 10%, which suggests a higher risk. An LTV ratio of 60% means that the borrower had enough funds on hand to put down almost half of the purchase price. Also, the property value itself is important. You’ll want to find out how the amount of the loan compares to the appraisal on the property, to ensure that in the case of default you will be able to get something close to what you invested for your share.
Now the good part: Investment returns
When you read the website of a syndicated mortgage provider, you’ll see investment returns of 8% or more. However, this is just your expected rate of return. This is not a guaranteed rate – if it were, remember that there wouldn’t be much risk. This is why you need to pay attention to the builder’s reputation (the one taking out the mortgage for construction), as well as the possibility that the builder might sell the project – in addition to performing due diligence on your appraisal.
Just remember – this is not a liquid investment.
With a liquid investment, you can find a secondary market to sell the paper and take cash when you need it. With a syndicated mortgage, you cannot get your money back until the term or contract comes to an end. The contract terms bind you – not just the borrower.
Can you use RRSP funding to invest in a syndicated mortgage?
Yes, in most cases. Generally you can also use RSIP, LIRA, RRIF, RFSA and RESP funds to invest as well.
So are all syndicated mortgages alike?
Not at all. The contracts read similarly, but each project and property has its own characteristics. You might make 16% on one contract, but you might see the next one go into foreclosure. This is why it is crucial to read up on the reputation of your syndicated mortgage provider, the builder and anyone else involved in the project.
Still have questions? Get in touch with a syndicated mortgage provider today. Each loan is different – and each borrower has different needs. A reputable broker will patiently answer all of your questions and be up front about the balance between risk and reward for each potential loan.