A syndicate mortgage is where two or more investors join together to provide a business with a specific kind of mortgage. As an investor in a syndicate mortgage fund, you are recognized as a part owner of the mortgage based on the amount of money you’ve put forth. What’s more, each investor has the full face value of their principal registered in their name at the Land Registry Office.
Developers and builders use syndicated mortgages as part of their financing to take a project from conception to completion. Since banks are not too keen on funding a building project that hasn’t even started, developers will rely on syndicated mortgages to cover soft costs: consultant fees, zoning permits, architecture costs and even marketing and sales expenses. All this is to say that the mortgage you’ve provided is funding the initial stages of a project not the actual building of the project.
While mutual funds, stocks, and segregated funds provide you with shares or units that can fluctuate in value, a syndicate mortgage investment is secured against real property, enabling you to enjoy a steady interest draw.
The Top 10 Things You Should Know about Investing in Syndicated Mortgages
A syndicated mortgage is a loan
A syndicated mortgage, like every type of mortgage, is a loan from an investor/lender to a borrower. The difference between a syndicated mortgage and a non-syndicated mortgage is that there are more than one investor/lender in a syndicated mortgage. There are significant benefits of investing in a mortgage, including the fact that the borrower is contractually obligated to repay the amount borrowed with interest based on the contract. This is very different from investing in securities, such as stocks and mutual funds that do not have a contractual obligation to repay you any of your investment.
A syndicated mortgage contains risk
Any time you invest money there is a risk. Different investments have different levels of risk. Risk can be defined as the likelihood of getting what you expect from the investment. For example, when you invest in mutual funds there is a risk that you could lose every dollar invested since there is no legal requirement to give you that money back. You are investing in the hope that the fund increases in value based on several factors. That hope is based on the fund manager and past experience.
There is an expectation that the funds are managed professionally and with a specific level of competence relative to the historic rates of return. Regardless of how secure you may think your investment is, when you give someone else money there is a chance that you won’t get it back. Managing risk is about understanding the odds of getting your money back and making a profit.
In syndicated mortgages, there is still the risk that you won’t get your money back because you have given it to someone else, and when someone else has your money, you don’t. That seems elementary but it is the cornerstone of managing risk. Investing in securities is different than investing in a mortgage. In a mortgage the borrower is contractually obligated to repay you with interest. But there is still that risk. Failing to understand the risks in any investment can lead to unrealistic expectations.
Syndicated mortgage are provincially regulated
Syndicated mortgages are regulated provincially. In Ontario syndicated mortgages are covered under the MBLAA (Mortgage Brokers, Lenders and Administrators Act) because they are a mortgage. The legislation is enforced by the Financial Services Commission of Ontario (FSCO) and all providers of syndicated mortgages must be licensed as a mortgage agent or mortgage broker.
The value of the project is important
When considering what project to invest in, it is vitally important to understand the project. Value if of extreme importance because that helps determine the level of risk involved in the investment by determining the loan to value. Typically, the lower the loan to value, the safer the investment.
The loan to value is important
The loan to value ties into the value of the project as previously discussed. A loan to value is the amount of the loan or mortgage to the value of the property. For example, if the mortgage is $200,000 and the value of the property is $400,000 then the loan to value is $200,000 divided by $400,000 which equals 50%. Most syndicated mortgages have a maximum loan to value of 85% to ensure that there is enough equity in the property to pay the investors back once the property is sold.
Your investment returns
While syndicated mortgage providers will tell you that you can expect a rate of return of 8% or higher, it is important to understand that this is an expected rate of return. Unlike a bond or GIC, the rate is not guaranteed. If it was guaranteed there would be little risk, therefore little rate of return. The borrower will typically set aside part of the amount borrowed to pay the interest during the term of the loan, but repayment of the entire principal amount is largely dependent on the success of the project. That’s why it’s important to understand the risks involved in the project, including the reputation of the builder, the likelihood of the builder selling the project or obtaining additional financing, the accuracy of the appraisal, etc.
Is this a security?
No. Unlike a security that doesn’t offer collateral and is a straight investment, a syndicated mortgage is secured by a mortgage and a contract between the borrower and the investor/lender that legally requires the borrower to repay the investment with interest (depending on the specific project).
Is this a liquid investment?
No. There is no secondary market for syndicated mortgages and therefore you cannot get your money back until the end of the term or end of the contract. As the investor/lender you are bound by the contract, just as the borrower is.
Is this RRSP eligible?
Yes, syndicated mortgages are typically RSP, TFSA, LIRA, RRIF and RESP eligible.
Are all syndicate mortgages the same?
No! Each syndicated mortgage, while contractually similar, is unique because the properties and projects are unique. Just because you make money on one syndicated mortgage doesn’t mean you will on the next. It is extremely important to understand the experience of the syndicated mortgage provider, developer and others involved in a specific transaction as well as the risks specific to that transaction.
Please NOTE: This is general information about syndicated mortgages. You must always speak to an individual who is licensed or who meets the requirements of his or her jurisdiction in order to sell, discuss or otherwise promote syndicated mortgages. Nothing in this article is designed to promote syndicated mortgages or otherwise suggest that they are better than other investments. All investors have different risk tolerance and you must obtain your own independent advice as to which investment you wish to invest in. Mortgage investing is not suitable for all individuals and contains risk that some investors will not feel is acceptable