Here are some common questions
about mortgages & investments
Why do Canadians typically request a private mortgage?
What is a typical return on investment?The answer to this question is two-fold. The first aspect to understand is the need for borrowed funds. Common reasons include:
- Debt consolidation (combining a number of unsecured debts into a single monthly payment)
- Renovations to their existing property
- Obtaining a down payment to buy a second property, or to bridge a gap between selling and buying a principal residence
- Family debt & divorce
- Business investment (banks are particularly stringent when lending to business owners)
The second question at hand is to understand why they are not borrowing from a bank? Common reasons include:
- The borrower has an urgent need of the funds, and the bank’s process is too slow
- Occasionally applicants are not willing to satisfy all banking conditions (i.e. a bank may require the applicant to close other credit facilities, discharge other encumbrances on the property etc.) and the applicant may wish not to do so.
- The most common reason a borrower is seeking funds from a private lender is simply that they have been denied by the bank. Generally, this grouping of applicants has damaged credit or challenges with meeting the bank’s requirement for income ratios. Whatever the reason may be, Canadian banks have increasingly tightening criteria which have resulted in more Canadians in need of borrowing money directly from other Canadians.
How is my Investment Protected?
All mortgage loans are secured by real property in Ontario. Upon the investment closing, the investor(s) will be registered on title to the property the same way that a bank would be registered on title when they provide a mortgage. Since the property provides the lender with the security for their loan, it is paramount to protect the investor’s interest in this property. Before closing, the lender(s) are made beneficiary on two types of insurance. The lender(s) are added as a loss payee on the fire insurance policy of the property. Additionally, the solicitor ensures a title insurance policy is taken out for the benefit of the lender providing additional protection.
To compliment these protections which heavily mitigate risk at the time of closing, Hosper Mortgage also has a full-service admin team who manages your loan throughout the term of the mortgage. This naturally serves to mitigate risk since the Hosper Mortgage admin team is in constant contact with the brokers who arranged this loan with the borrower, and also have the resources to contact the borrower directly should there be any issue with the loan throughout the mortgage term.
How does Bankruptcy affect my mortgage loan?
Personal Bankruptcy and Consumer Proposal are both remedies that Canadians may use when in financial distress. However, it is important to understand that both of these remedies deal with a borrower’s unsecured debt only. Neither Bankruptcy or Consumer Proposal dismiss a borrower from their obligations under a mortgage loan. This is because a mortgage is a secured loan, securitizing the property as collateral. The only way to discharge a mortgage registered on title is to pay it out from available funds, alternative financing or from the proceeds of the sale of the property.
It is also important to note that a mortgaged property cannot be sold or transferred without discharging the mortgage. That is why all real estate transactions in Ontario require the work of real estate lawyer(s).
What is a typical return on investment?
The minimum return on investment 8%. This is the interest rate paid to you, the investor, to borrower your funds. Occasionally, the annualized yield can increase if the borrower decides to return your funds earlier than expected. (Continue reading for more information on early discharge). In many cases, the return on investment has exceeded 10%.
How long do I have to commit my investment for?
The majority of our approved loans have a 12-month term. In the mortgage industry, this is considered a short term loan. Short term loans are preferred by private mortgage investors because they protect the investor by limiting exposure to long term market volatility. On a case by case basis, we do occasionally offer 6-month and 24-month loans.
Regardless of term length, all of our mortgage agreements allow for renewal at the sole discretion of the investor(s).
The above notwithstanding, we advise that mortgage investments are generally illiquid. We recommend you do not invest funds which you may need urgently as the resale of mortgage investments is possible, but cannot be guaranteed.
How is my investment taxed?
Hosper Mortgage Investments is a fully licensed mortgage administrator recognized by FSCO. We comply with all CRA requirements regarding tax reporting and audit. For the convenience of our investors we can provide a statement of earnings to assist with their annual tax filings. However, since all our investments are direct mortgage investments, there is a self-reporting obligation on each investor to self-report their interest income received from the borrower. Hosper Mortgage does directly not report investment income to the CRA or issue a T5 statement. We advise each investor to consult an accountant to obtain proper taxation advice based on your specific circumstance. There can be no guarantee that the current tax position prevailing at the time of an investment will not change.
What is Loan to Value?
Loan to value is a very crucial ratio for mortgage lenders. This ratio represents the share of value of a home which is debt (i.e. loaned by banks or private lenders) against the total overall value of the home.
For example, let’s consider a home owner who has a property worth $1,000,000 and they have a first mortgage for $700,000 from the bank. Now they would like to request a second mortgage from a private lender for $100,000.
In this scenario, the LTV of this second mortgage deal would be 80%
$800,000 (Combined Value of Loans) / $1,000,000 (Value of Property) = 80%
In practice, the lower the LTV value, the stronger the deal because the home owner has a greater percentage of remaining equity protecting the private lender’s investment.
Note: In the above example the home owner has 20% equity remaining in the home. ($200,000)
Investors of private mortgages generally like to have a minimum of 15% equity remaining in the property. (i.e. maximum LTV 85%)
Can I use my RRSP, RESP, and/or TFSA accounts to invest?
Due to the short closing timeline for direct mortgage investments (1 week) only non-registered funds are eligible for investment. However, Hosper Mortgage manages a mortgage fund (Hosper MIC) to accommodate RRSP, RESP and TFSA eligible funds. Speak with a representative for more information.
Can I invest in only part of a loan? Can I split the loan with a friend?
Yes. You can split the loan with a friend, or we can fill the remaining share of the loan with another investor in our network.
Whenever more than one investor come together to extend a loan to a borrower this is called syndication. While this is more common in construction financing, we can use the same approach to split a loan into smaller shares at the preference of our investors. (i.e. If the loan is requested for $120,000; 2 investors could each take a $60,000 share, or three investors could take $40,000 shares, etc.)
Since more effort and time is required to complete a loan in syndication, preference will always be given to a single investor taking sole share in a loan. That said, approx. 30% of our loans have more than one investor.
Do I have to pay any management fees to invest with Hosper Mortgage?
Unlike mutual funds where fees are subtracted from your overall gain on investment, none of our fees are collected from the investor. While we do collect fees to manage and service the loans, all of these fees are paid by the borrower at the time of closing.
Do I need my own lawyer? Who pays my legal fees?
We will provide you with a qualified third party real estate lawyer to represent your interests as the investor(s) to close the investment. Just like the management fees, legal fees are also paid by the borrower.
What are the investor(s) responsibilities during the term of the mortgage?
To be frank, not much effort is required from the investor(s) to participate in this type of passive investment. Hosper Mortgage is set up as a full-service administrator, which means the investor(s) have their money work for them, and we do the rest. However, our operating model does require each lender to select and approve the specific investments that they wish to participate in. As such, there is a requirement to review deals and work with one of our staff to select the right investment based on each individuals investment objectives.
Aside from reviewing the investment opportunity and property appraisal, the investor is required to sign off on a FSCO (Financial Service Commission of Ontario) mandated disclosure document and a servicing agreement for each loan.
What happens if the borrower defaults on their loan?
A default can happen in two primary ways; either the borrower misses consecutive mortgage payments throughout the term of the loan, or the borrower is unable to pay back the principal at the end of the term. Let’s discuss each scenario individually.
- Missed Payment – We facilitate all payments electronically. Payments are withdrawn from the borrower’s provided bank account on the first of each month, clear our licensed trust account, and are deposited to the lender on the 7th of each month. The 7 day period of time is required to determine if any payments are returned due to insufficient funds. If so, no action is required from the investor(s). Investors will be notified of the NSF occurrence and our admin team will proactively reach the client to collect the missed payment. Generally, we allow for 30 days of attempted collection (via contact by phone, email and postal mail) before proceeding with a power of sale enforcement.
- The principal is not returned upon maturity – To mitigate against this, we generally send notice to the borrowers 60 days prior to maturity to initiate contact and encourage the borrower to consider their refinance options. At this time, the broker is likely already working with them on a new mortgage deal. (Generally, the mortgage brokerage remains in contact with the client throughout the entire term of the loan.) However, if the client does not have a new loan in place at the time of maturity, the mortgage is considered in default.
Whether a mortgage is in default due to missed payment throughout the term, or inability to repay at maturity, our first course of action is always to determine why this is the case. If the borrower wishes to stay in their home we always prefer to solve their problem and exit the Investor(s) investment with a new mortgage solution. However, in some cases the borrower’s financial situation or outlook has changed, and they can no longer afford to live in their current home. In this case, we generally encourage the client to list and sell the home themselves, and the principal of the mortgage is returned plus interest at the time of sale.
In the rare circumstance where a borrower is not cooperative or simply unable to meet their obligations under the loan, it is important for the investor (s) to understand they have the same rights as the bank, and our staff and legal team is capable of selling the property as stipulated by Ontario law using power of sale to recuperate the lender’s principal. It is important to understand that our business exists to facilitate loans from real people to other Canadians and that one’s inability to meet their mortgage obligation is generally a result of financial hardship. We often request patience on the part of our investors as we work towards a win-win solutions. All the while we recognize that protecting the principal of our investors is paramount and remains our single biggest priority.