WHAT IS A PRIVATE MORTGAGE?
A private mortgage is an alternative form of funding whereby an individual or entity lends money to a borrower that is usually seeking private funding because he or she is not able to obtain funds from an institutional lender. While there are many reasons why an individual would seek private funding such as poor credit or employment history, some individuals simply turn to private mortgages because obtaining funding from an institutional lender would be too difficult or time-consuming. For example, our experience shows that many individuals who are building custom homes look to private mortgage funding because obtaining funding from an instructional lender for construction purposes may be difficult. Lenders in the private mortgage industry are primarily concerned with the equity remaining in the property and are thus generally less concerned about the history of the borrower. Interest rates offered by private lenders are usually much higher than the interest rates offered by banks, trust companies, or B lenders.
HOW CAN I BECOME A PRIVATE LENDER?
If you wish to invest in private mortgages in the province of Ontario, you can invest in private mortgages through a Mortgage Investment Corporation or through direct mortgage lending. If you decide to invest in a Mortgage Investment Corporation, you will be issued shares in return for your investment into the Mortgage Investment Corporation. In the alternative, individuals or entities are authorized to engage in mortgage lending transactions. In this scenario, the lender typically works with a licensed mortgage broker or brokerage to vet investments and find viable borrowers. The broker will usually charge a broker fee which is paid by the borrower. Once a viable transaction is identified and underwritten by the broker and the lender, a commitment is signed, and the file is passed on to the lender’s lawyer for due diligence and funding.
HOW WE CAN HELP
At Jahanshahi Law Firm, our real estate law team has the knowledge and experience to represent lenders who are looking to diversify their investment portfolios by investing in private mortgages. For some investors, private mortgages may offer an attractive form of investment as the mortgage is secured on the title of the property owned by the borrower. We represent many investors within the province of Ontario who often invest in mortgages that are ranked in first or second priority. Our real estate lawyer(s) in addition to having knowledge of the business and real estate market, have the legal expertise to provide lenders with sound legal advice throughout their investments.
STEPS TO A PRIVATE MORTGAGE LENDING TRANSACTION
We provide comprehensive legal services to private mortgage investors including representation on transactions, mortgage administration, and mortgage enforcement. The private mortgage investment typically starts with the drafting of a commitment letter that sets out the terms of the mortgage investment. Once retained, we will prepare the investment based on the commitment letter and ensure that the investment meets the legal due diligence requirements of the lender. Upon completion of the transaction, we will promptly report to the lender and if required, administer the mortgage on the lender’s behalf. Administration of the mortgage will include management of all communications with the borrower during the term of the mortgage, deposit of all monthly payments into the lender’s account, and management of all borrower requests such as requests for renewal, extension, or discharge of the mortgage. In the event the borrower defaults on the investment, we can enforce the terms of the mortgage and represent the lender in the power of sale proceedings, as necessary.
If you are a private investor or are thinking about investing in private mortgages within the province of Ontario, contact our real estate law team to set up a free initial consultation where we can answer any questions you may have about private mortgage investments.
What Impacts the Interest Rate and Fees in a Private Mortgage?
The general rule of investment and economics is that the higher the risk, the higher the potential return for the investor. When investing in private mortgages, the following variables have an impact on the risk of the investment:
- Priority of the mortgage;
- Loan-to-value percentage based on appraisal and debt owing on the property;
- Location of the property;
- Type of property;
- Property Features.
- Applicant credit history;
- The term of the mortgage;
- Market conditions; and
- The lender’s internal guidelines.
Please note that the above list is not exhaustive and there may be other variables that contribute to an increase or decrease in fees and interest rates associated with a private mortgage.
What are the Typical Fees Involved in a Private Mortgage Transaction?
Prior to signing the commitment letter, the borrower(s) should carefully read the commitment letter to ensure that they clearly understand the fees, interest rates, and disbursements involved in the transaction. We recommend that the borrower have an experienced real estate lawyer review the terms of the commitment to ensure they understand what they are signing. Below you will find a list of typical fees you should look out for:
- The interest rate of the mortgage;
- The lender fee;
- The broker fee;
- Administrative fees;
- Appraisal fees;
- Walkthrough fees;
- Initial set-up fees;
- Lender’s lawyer’s fees and disbursements;
- Borrower’s lawyer’s fees and disbursements;
- Discharge statement fees;
- Renewal fees; and
- Lender’s discharge lawyer fees.