For many years, the bulk of private mortgage lending was concentrated into second mortgages where the private lender was going behind a bank or institutional first mortgage.
The rationale for this type of lending was that 1) there was lots of demand in the market; 2) because the mortgage was going to be in second position and carrying a higher risk, a higher rate of interest could also be charged, providing a good rate of return, and 3) the amounts for most second mortgages were relatively small, allowing the investor to develop a well diversified mortgage portfolio without having a large amount of cash to work with.
Second mortgage lending remains very popular in Canada as housing prices continue to hold for the most part and consumer debt still sits at very high levels where refinancing or consolidating debts into a second mortgage to leverage available equity is a common cash flow management and debt management strategy.
But since 2008 when the last great recession hit, there has been an ever growing supply of private first mortgage opportunities, mostly on the commercial property side.
With banks tightening up on lending requirements, there is a large supply of product or financing requests on the market at any given time that require private mortgage financing, or more accurately are forced into private mortgage options.
This has not only attracted individual investors and investor groups, but those that have more substantial cash holdings for mortgage investing.
The commercial private firsts that are available are, on average, significantly larger than the average residential private second mortgage, so placing this type of loan requires considerably more capital resources.
In addition to being able to fund bigger deals that are lower risk that perhaps what we’ve seen in the past, more investors have entered into private lending to more easily diversity their multi million dollar portfolios.
The rate of return on a private first for the most part is going to be higher than a private 2nd, but not necessarily depending on the time to get in place, the property type, and the geographic location.
First mortgages also provide the deal control many investors require with first mortgage position versus being in second spot behind a large institutional lender.
The main benefit of these develops is the establishment of a sub prime market for commercial property in the $500,000 to $3,000,000 range.
Near bank deals can also be highly sought after by private investors, creating competitive pressure on pricing and terms to secure deals.
In fact, in certain strong market areas such as the Greater Toronto Area, private first mortgages can be priced only slightly higher than similar institutional deals allowing them to be considered as a short term funding option even over a bank deal if the circumstances and timing warrant.
The bottom line here is that there are many different ways to operate in today’s market as a private mortgage investor, largely driven by the contraction and selectivity of institutional lenders on commercial property deals.
If you would like to explore commercial first mortgage lending and investing opportunities with private funds, I suggest that you give me a call and we can go over both your lending and funding criteria as well as potential deals you many be interested in that are currently available.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh