FAQS
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:
- To purchase a new home
- 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.
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.
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).
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.
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%)
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.
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.
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.
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- 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.
Effective December 1, 2022, all renewed mortgages will be re-priced at current market rates. If the borrower requests renewal, we will obtain a new appraisal, determine the current LTV, and re-price the deal as if it were a new submission. Upon receipt of the appraisal report, we will present you with an updated rate of return for the renewal term. If you’d like to renew, we will advise the client and once the renewal agreement has been signed by the borrower, we will send the servicing agreement for you to sign.
Please note: if you do not respond to the renewal offer within 5 business days, Hosper will make the most prudent decision as if it were our own mortgage.
Our renewals team will advise you of the borrower’s intent to renew or payout ~30 days before maturity. It is common, however, for our team to only be informed of the client’s action plan at or even shortly after maturity.
In most cases, payouts will take place within 2-4 weeks before or after the maturity date. If a mortgage passes the scheduled maturity date, our team will work with the borrower and broker to have the loan paid out as soon as possible. Delays in payout are common and should be anticipated. Strategically speaking, patience to allow a clean exit to occur may be recommended over asserting your right to enforce shortly after maturity. Please allow us to guide you through this process, leveraging our experience exiting 5000+ mortgage investments.
If you have questions about an upcoming maturity where you prefer NOT to renew, please let us know with as much advance notice as possible. Our renewals team can be reached at renewals@hospermortgage.com. We aim to resolve these cases within 30 days from the scheduled maturity date.
You can also see if your DMI is eligible for our MIC Rollover Program. Those invested in a MIC share class avoid the potential “headaches” that often come with renewals, as their single investment is spread across a portfolio of loans each managed by Hosper experts.
If you would like to learn more about the MIC Rollover Program, please get in touch with Scott Stevens, MIC dealing representative, at (647) 684 9153 or scott@hospermortgage.com.
Upcoming maturities are listed on your monthly Investor Statements under the “ACCRUED INTEREST” section, so you can keep track of upcoming maturities and inform us each month if you know you can NOT continue with a mortgage.
We suggest reviewing your statement each month to stay updated on your investments and any upcoming maturities.