How to Invest in Private Mortgages: A Step-by-Step Guide

Private mortgage investing is an alternative way to grow your money. Instead of putting cash into stocks or bonds, you lend it to someone who needs a mortgage. This could be a homeowner, a property investor, or even a small business. In return, you earn interest, often much higher than what you’d get from a savings account or other fixed-income products.

Real estate secures the loan, so there’s property behind it as collateral. Many private investors see this as a way to earn high returns. They also want to protect their income and capital.

This guide explains private mortgages, discusses reasons to invest in them, outlines the risks you should know, and details the steps you can take to get started. By the end, you will know how to invest in mortgages with confidence. You can choose direct lending or investing in a mortgage investment corporation.

A private mortgage is a loan for a home or property. Someone other than a bank or credit union funds it. This “someone” could be you, another individual, or a group of people pooling money together.

A licensed mortgage lender or a Mortgage Investment Corporation (MIC) usually arranges these loans. The process is generally faster and more flexible than working with traditional lenders.

People turn to private mortgages for different reasons:

Because private mortgages are more flexible, they often help borrowers who have solid assets but don’t meet strict traditional bank requirements.

Private mortgage investing attracts many investors not only for its unique role in connecting capital with borrowers who can’t access traditional financing, but also for the opportunity to participate in deals often reserved for institutional players. Here’s why many investors are drawn to Private mortgage lending investment:

The interest rates on private mortgages are usually much higher than on government bonds, GICs, or bank savings accounts. Depending on the deal, you could earn annual returns of 7% to 14% or more.

Your investment is secured by real estate. If the borrower doesn’t pay, you can take legal steps to recover your money through the property itself. This means your income and capital are tied to a physical asset, and with Hosper’s involvement, those steps are handled by a team of specialized professionals, not the investor alone.

If most of your investments are in stocks or bonds, adding a private mortgage can balance your portfolio. The real estate market often moves differently from the stock market, which can help reduce risk.

Many private mortgage deals pay regular dividend payments typically monthly. That can mean a consistent stream of income without having to sell your investment.

Like any investment, private mortgages aren’t risk-free. The main risks include:

Borrower Default

The borrower might not make payments on time, or at all. In that case, Hosper usually works with the borrower to get payments back on track. In the case of a necessary foreclosure, Hosper’s involvement ensures that investors are not left to handle this alone. As outlined by Hosper’s rigorous risk mitigation system in place to protect investor capital, Hosper works to maximize recovery within the equity buffer, and can often turn a profit from property sales.

Market Risk

Property values can go down, especially in a cooling real estate market or during a higher interest rate cycle. If the value drops too much, it can affect your security.

Liquidity Risk

Your money is tied up for the term of the loan, which is often 1–3 years. You can’t just cash out like you can with stocks.

Legal and Regulatory Risk

The rules for lending can be different in each province or state. You need to make sure your investment follows all local laws. Working with a licensed dealing representative or account manager ensures you stay compliant and understand every step.

Pro Tip: Many experienced private investors aim for a loan-to-value (LTV) ratio of 65% or less. That way, even if the property value drops, there’s a better chance of getting your money back in full.

There are three main approaches:

Option 1: Direct Mortgage Investing

You fund the entire loan yourself and work with a licensed mortgage lender to handle the paperwork and register the loan.

With Hosper, even in a direct mortgage investment scenario, you’re not alone. Hosper manages the loan administration, borrower communications, enforcement if needed, and property disposition to protect and optimize your returns. Hosper further works closely with a law firm to ensure compliance.

Pros:

Cons:

You pool your money with other investors. The MIC then lends that money out to many different borrowers.

Pros:

Cons:

You join other investors to fund one large mortgage.

Pros:

Cons:

Here’s a step-by-step approach:

1. Set Your Budget and Risk Tolerance: Decide how much money you’re willing to put in and how much risk you can handle.
2. Pick Your Method: Choose between direct mortgage investing, joining a MIC, or participating in a syndicate.
3. Work with Professionals: Speak with a dealing representative. They will ensure you understand your investment, follow regulations, and have a clear plan aligned with your objectives.
4. Review the Deal: Look at the borrower’s credit history, the property’s appraisal, and the LTV ratio.
5. Secure the Loan: Make sure all legal documents are in place, the loan is registered on the property title, and insurance is in place if needed.
6. Track Your Investment: With Hosper’s management, you’ll receive updates on payments, borrower performance, and any developments that may require action.

The real estate market reacts strongly to interest rate changes. In a higher interest rate environment:

But there’s a trade-off. Higher rates can also mean more borrowers have trouble making payments. That’s why due diligence is so important.

Private mortgage investments often pay dividend payments. Depending on where you live and how you structure the investment, these payments can be taxed differently.

Some investors choose to take the income as cash. Others reinvest their dividends to grow their capital faster. The right choice depends on your goals and financial situation.

If you’re not sure, talk to a tax advisor who understands Private mortgage lending investment and the rules in your area.

Some investments with Hosper are eligible for RRSP and TFSA.

Even experienced investors benefit from having an expert team manage their mortgage investments. Hosper:

When you put money into a traditional bank product like a GIC or savings account, your returns are usually low. In contrast:

While bank products are safer, they don’t offer the same potential for annual returns in the 7–14% range.

1. Skipping Due Diligence: Always check the borrower, property value, and LTV.
2. Investing Too Much in One Loan: Spread your risk when possible.
3. Ignoring Market Trends: Keep an eye on the real estate market and interest rate changes.
4. Not Planning for Taxes: Understand how your dividend payments will be taxed.