When it comes to private mortgage investments, there might be a lot of fear on the part of the investor. After all, that just comes with the territory when you’re talking about any kind of investing at all. But there’s one fear in particular that private mortgage investors want to protect themselves from – the loss of their capital. We’re here to debunk that myth today, and to show you why there’s simply no reason for it.
At first glance, it’s a bit understandable why the fear is there in the first place. After all, the borrowers receiving the private mortgages go that route because they can’t get financing from a traditional institution, such as a bank. So the chances that the borrower is going to default on the loan are most likely considerably high. Or at least higher than they would be in a traditional mortgage. It’s for this reason that private mortgage investors are significantly worried that they could potentially lose their capital. But, we can still debunk that fear.
The security, from the investor’s point of view, comes from the loan to value ratio. Typically this only has to be 20 per cent at a traditional bank, where the borrower must put up a down payment worth 20 per cent of the home’s value in order to get the home loan in the first place. With private mortgages however, that loan to value ratio needs to be much higher. It’s a requirement that’s put there in order to protect the investor from their biggest fear – losing their capital.
The loan to value ratio for private mortgages is typically a minimum of 35 per cent, meaning that the borrower must put up 35 per cent – not 20 – of the home’s value in order to meet the requirement for the investment. In some cases, that loan to value ratio can be as high as 50 per cent, meaning that the borrower must come up with half of the home’s purchase price. That is one form of protection for the private mortgage investment. The other is the actual property that the funds are being loaned for.
Just like any other financial institution, should the borrower default on the loan, it’s the lender or the investor that will take over the property, and the full value of it. In Canada the rights of the lender or investor are fully protected and, even if it takes awhile, there will be a power of sale action taken against any home borrower that defaults on the loan – regardless of where that loan came from. A lawyer will take over the proceedings from there, and the worst thing that you’ll lose is a matter of time waiting for that to go through.
Losing such a huge chunk of capital can be frightening for any investor. Know though that when it comes to investing in private mortgages, that capital is protected in a way that cannot be guaranteed in any other form of investment. It’s just one of the things that makes private mortgage investing so attractive to private investors.