Becoming a Private Lender
| March 11, 2020
Current Canadian mortgage rules, including the stress test, have made it more difficult for some people to get mortgages from traditional lenders, such as banks and credit unions. Those who are self-employed, first-time home buyers, new to Canada, or have credit challenges, are finding it particularly difficult.
As a result, more buyers are turning to private lenders to secure a mortgage.
Private lenders include mortgage investment corporations, investors who pool their capital (syndicated mortgages), or individuals lending their own money. According to the Bank of Canada these types of lenders have seen their share of the market in Canada double between 2015 and 2019.
Private lending can be an attractive business opportunity because:
- it provides a good return on your savings/investment
- some private mortgages are eligible to be inside an RRSP which are managed by a financial institution
- private mortgages are usually registered on a property (secured by real estate)
If you are considering becoming a private lender, you will need to:
- understand the property value trends in the area where the property is located
- verify the true value of the home or property. Do your own due diligence, including obtaining an independent appraisal, checking the property registry, etc.
- find out if there are other mortgages registered against the property—this may impact your priority and ability to recover funds if the borrower defaults
- be wary of investing in a house flip requiring renovations as the property’s value might be inflated based on proposed renovations.
- make sure there is a contract for all proposed renovations
- verify that your mortgage broker and real estate agent are licensed with RECA
- be cautious of the risks of taking out a second mortgage on your own home to invest in a private mortgage
- consult a lawyer and obtain your own independent legal advice
- consult an accountant to understand the tax implications
- understand who is managing the mortgage and what the costs are*
*The manager of the mortgage will be responsible for important tasks such as issuing the mortgage commitment to the borrower, instructing the lawyer on registering the mortgage and disbursing the funds, collecting payments, checking for proper insurance, verifying taxes are paid, providing the borrower with statements, managing foreclosure and property disposition in case of borrower default, handling payouts and renewals.
While private lenders are not regulated, mortgage brokers representing private lenders and borrowers in Alberta are licensed by RECA. Note that managing the mortgage (also called mortgage administration) require a mortgage broker licence. Be sure to check reca.ca to ensure the person you are working with is licensed.