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Pros and Cons of Investing in Private Mortgages

First, let's clarify what kind of loans. We're not talking about high loan to value loans that banks make. What we�re dealing with here are VERY LOW Loan To Value (LTV) loans. By that, we mean no higher than 50-70% of the value of the property securing the loan. This means if a house appraises for $ 100,000 you wouldn�t make a loan for any higher than $ 70,000. That's a 70% LTV (Loan To Value) ratio. It�s obvious why this is a much safer approach than most lending institutions take.

Investors must choose what sort of real estate they are willing to finance because this real estate will be the security for their investment. For those unfamiliar with mortgage financing it would be prudent to invest only in residential or recreational properties. Making an investment in a commercial transaction can be much more complicated and much riskier. A good rule of thumb is to invest only in a geographical area that you are familiar with and visit the property before you decide to make your investment.

Yields on mortgage investments will be determined by risk. The higher the risk, the higher the yield. In todays market you can expect a yield of 10% to 13% for a moderate level of risk. Minimum investments of $10,000 are required for private mortgages.

The typical borrower who needs private financing would be a self employed individual or someone who may have had a bad credit history in the past. They may have a substantial cash downpayment available but don't meet the stringent underwriting criteria of the banks. Another area where private funds are used is for cottages. The banks shy away from properties that are not inhabitable year round but if you are familiar with the area you may have no problem making such an investment.

Private mortgages can also be held in a self directed RRSP. Mortgages are an ideal RRSP investment because they earn interest income that can be sheltered within the RRSP. If you were to invest in a mortgage outside of your RRSP your interest income would be taxed at your full marginal tax rate, thus lessening the benefit of your investment.

So what's it going to be? Are you going to continue to let other people control your money so you can get a return that barely keeps up with inflation, or are you going to take control and make sure that when you get ready to start spending, you can do what you want without worrying about money.

Mortgage lending is an incredible way to build wealth in a hurry that most people aren�t aware exists. Now, you are not one of those uninformed people anymore.

If you are interested in making an investment in private mortgages, or would like more information, please contact Basic Mortgage.

Contact us for more information.