The word ‘mortgage’ often evokes thoughts of a financial responsibility that stretches on and on for decades. There are countless corporations ready for you to take a number and become one in a long line of faceless debtors. But there is another way: private mortgage investments.
What are private mortgage investments?
A private mortgage investment involves a contract to borrow money from a private individual – not a bank – which will be paid back according to the stipulations and rates (usually between 6 to 13%). While this may sound like a daunting initiative, it can be a mutually-beneficial arrangement.
How does it work?
While banks have certain borrowing criteria that need to be met before any loan is approved, this is not the case for private mortgage investments. In these cases, a borrower can be approved even if they are self-employed, their finances have hit a temporary slump, or other generally disqualifying reasons.
Repayment durations can be short-term, or longer-term, the latter more resembling those from traditional bank and loan establishments.
What are the risks?
Private investment opportunities generally bring to mind loan sharks, but this is not the case here. While there are still the well-known risks, smaller businesses that offer loans are minimising it by allowing investors to contribute to the overall loan amount, like a bond.
Who can benefit?
Both parties can benefit from a private mortgage investment. For the borrower, they can experience an expedited approval progress, and for the lender, they can make a nice profit while expanding their investment portfolio.
How do the investors make money?
As with any loan, profit is predominately made from the interest payable. There is still some risk, of course, but this is limited by the large down payment made – typically 30 to 40% of the loan amount. If the debtor defaults on their payments, the investor is able to claim the property and sell it, recouping the loss and making a profit.
What about investment groups?
As briefly discussed above, investment groups mean investors do not need to put forward the finances on their own. Groups can pool their money, allowing for bigger loans, with a lending company processing the agreement. This also reduces the risk of one person losing too much if a loan falls through or a payment is delayed. The lender will take their cut before the investors get their payout, accounting for fees, etc., but it means you won’t have to worry yourself with the paperwork.
Private mortgage investment has been gaining traction over the last few years, with many turning away from traditional bank loaning schemes. As with any major financial decision, it is always recommended you seek professional advice before signing any documents or supplying any money.