Each syndicated mortgage, while contractually similar, is unique because the properties and projects are unique. A syndicated mortgage is quite simply any mortgage in which two or more individuals participate as lenders in a single mortgage. The mortgage could rank as a first charge (“mortgage”), second, third, fourth, or even fifth or higher charge on the security of real estate.
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 or mutual funds that do not have a contractual obligation to repay you any of your investment.
The risk with syndicated mortgages is knowing what projects to invest in and who you are lending your money to. 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.
When considering what project to invest in, it is important to understand the project. Value is of extreme importance because that helps to determine the level of risk involved in the investment by determining the loan to value (LTV). Typically, the lower the LTV, the safer the investment.
The LTV ties into the value of the project. A LTV 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 LTV is 50% (calculated as $200,000 divided by $400,000 which equals 50%). Most syndicated mortgages have a maximum LTV of 85% to ensure that there is enough equity in the property to pay the investors back once the property is sold.
Syndicate investments range from 8-12% returns per year, for generally 2-4 year terms. The investor is generally paid quarterly or monthly. The 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).
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. The investor/lender is bound by the contract just as the borrower is.
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 and not a security. 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.
FSCO ensures that all members comply within the FSCO act which includes: proper licensing, client complaints, tribunal proceedings, yearly audits, etc. FSCO has a variety of penalties in place for agents and mortgage brokerages that do not comply with the Act.
Since syndicate mortgage became popular in 2008, FSCO has dramatically increased the amount of disclosure required, making the industry much more transparent and the investor much more aware.
With interest rates at historic lows, syndicated mortgages might be something worth learning more about.
The following brief webinar video provides more information on syndicated mortgages and FSCO regulation.
Copyright © Landmark Capital