If you’re looking to invest in the real estate market, you may have heard about the syndicated mortgage and wondered how it could help you. Not everyone understands exactly what they are or how they work, so we’ve put together this fact sheet to help you make the best investment choice.
Syndicated mortgages are loans
Just like any other mortgage, the syndicated variety also involves a lender or investor providing money to a borrower. The only difference that the word “syndicated” adds is that syndicated mortgages have multiple investors or lenders. The contractual obligation that borrowers face when it comes to repaying the amount they took out with interest makes this a much more secure investment than putting money into the stock market or into mutual funds, because there is no contractual duty to cover your initial investment or to pay interest on what you lent.
Syndicated mortgages do involve risk
Every investment that offers a significant reward carries risk. If you put your money into a government-backed savings account, you will earn the lowest interest rates possible on the market. When you buy a stock, you are risking more, because the value of the company could plummet to zero, and you would be left with nothing. This is why people expect double-digit returns from the stock market. Mutual fund investments carry a similar risk, but the expected return might hold right below 10%. When you invest in a syndicated mortgage, there is the possibility that you will most if not lose all of your money that you put into the project. The borrower does have a contractual obligation to pay you back with interest, and there is collateral in the form of real estate associated with that contract. However, the borrower could default, and depending on sale of the real estate determines if all or some of your monies are recovered.
Provinces regulate the syndicated mortgage market
In Canada, each province has its own set of rules for syndicated mortgages. For example, in Ontario, the MBLAA (Mortgage Brokers, Lenders and Administrators Act) governs all mortgages, including the syndicated variety. However, as of March 1st 2021 the Canadian Securities Administrators (CSA) has finalized it previous 2018 reform and require an issuer of a syndicated mortgage to be licensed as an EMD (Exempt Market Dealer). Brokerages that previously offered this, will require this.
You need to pay attention to the value of the project
Are you considering several properties? You need to understand the nature and value of the project. Such variables as the location, the intended use and the zoning for a site will all play a role in the risk level that the investment will bring you.
The loan to value ratio is very important (as well as priority)
In basic terms, Let’s say that you require $200,000 financing on a $1,000,000 property. If you only have $400,000 equity with a 200,000 balance; the loan to value is 80%. However, if you had $800,000 equity with a $200,000 balance with the same request, the loan to value is 40%. Even though the lender is being asked for the same amount. The 80% loan to value represents a greater risk to a lender. Let’s say you default and the property value loses transaction and you factor in interest arrears, the 1st position lender is highly likely to get his monies back, but as a second position lender the lower loan to value offers more safety and buffer. The lower your loan to value ratio (the ratio of the principal to the appraised value of the property), in conjunction with the mortgage priority…the safer the investment for the lender.
Syndicated mortgages do not guarantee a rate of return
When you read a brochure or a website from a syndicated mortgage provider, you may see that they offer rates of return of 8% or even more. However, this is just the expected rate. There is no guarantee. If the project succeeds, then you’ll likely get your whole principal back. Review all factors of the Borrower, and the accuracy of the appraisal and likelihood of a sale or refinance to payout your investment.
Syndicated mortgages are securities
Effective March 1, 2021 (except in Ontario and in Québec where the changes are expected to become effective on July 1, 2021); syndicated mortgages are securities that require an EMD (Exempt Market Dealer) license.
Syndicated mortgages are not liquid
Once you have invested in a syndicated mortgage, you can’t let it go into a secondary market – because there is one. The borrower is bound by the terms of the contract, and so are you.
Syndicated mortgages are generally RRSP eligible
You’ll want to make sure with your provider, but in most cases syndicated mortgages are RESP, RRIF, LIRA, TFSA and RRSP eligible.
Each syndicated mortgage is different
Each project and each property is unique, so if you have a terrific experience investing in one project, don’t assume that you will on the next just because it’s another syndicated mortgage. Do your due diligence on the syndicated mortgage provider, the builder and any other parties who are involved with particular syndicated mortgage.
Get professional advice before you sign on the dotted line
This article contains general information about syndicated mortgages. This is not intended to promote syndicated mortgages or to indicate that they are superior to other investment vehicles. Each investor has a particular risk tolerance level, and you want to get your own advice before you sign a contract. Not every investor can lock up money in a mortgage for the amount of time that the contract requires.