BELOW ARE SOME OF OUR MOST OFTEN ASKED QUESTIONS.
How is my investment protected?
All mortgage loans are secured by real property in Ontario. Upon the deal closing, the lender(s) will be registered on title to the property the same way that a bank would be registered on title when they provide a mortgage. Since the property provides the lender with the security for their loan, it is paramount to protect the lender’s interest in this property. Before closing, the lender(s) are made beneficiary on two types of insurance. The lender(s) are added as a loss payee on the fire insurance policy of the property. Additionally, the solicitor ensures a title insurance policy is taken out for the benefit of the lender providing additional protection.
To compliment these protections which heavily mitigate risk at the time of closing, CRLI also has a full-service admin team who manages your loan throughout the term of the mortgage. This naturally serves to mitigate risk since CRLI’s admin team is in constant contact with the brokers who arranged this loan with the borrower, and also have the resources to contact the borrower directly should there be any issue with the loan throughout the mortgage term.
How does bankruptcy affect my mortgage loan?
Personal Bankruptcy and Consumer Proposal are both remedies that Canadians may use when in financial distress. However, it is important to understand that both of these remedies deal with a borrower’s unsecured debt only. Neither Bankruptcy or Consumer Proposal dismiss a borrower from their obligations under a mortgage loan. This is because a mortgage is a secured loan, securitizing the property as collateral. The only way to discharge a mortgage registered on title is to pay it out from available funds, alternative financing or from the proceeds of the sale of the property.
It is also important to note that a mortgaged property cannot be sold or transferred without discharging the mortgage. That is why all real estate transactions in Ontario require the work of real estate lawyer(s).
What is a typical return on investment?
The majority of our selected loans have a posted rate of 8.99% – 14.99%. This is the interest rate which the borrower pays you, the lender, to borrower your funds. Occasionally, the annualized yield can increase if the borrower decides to return your funds earlier than expected. (Continue reading for more information on early discharge)
What is a second mortgage?
The majority of our deal opportunities are second mortgage loans. Put simply, a second mortgage is a subsequent loan request offering a property as security and when a borrower already has a first mortgage on their property (generally from a bank). Many people, including many of our lenders, already have second position financing with their banks such as “Home Equity Lines of Credit”. In cases where a borrower needs additional funds but are not approved from their bank for additional financing, they may need to take a second mortgage from a private lender.
A second mortgage has the same legal implications as a bank mortgage, the loan is registered on title to the property and the lender has the same rights as a bank to liquidate the property to recuperate funds if necessary. By definition, it is called a second mortgage because it is registered behind an already existing mortgage on title.
A second mortgage is only subordinate to the first mortgage in order of payout upon sale (i.e. upon sale, all closing costs are disbursed, then the first mortgage is paid out in full, followed by the second mortgage, with all the remaining surplus going to the home owner). In all other ways, a second mortgage holder has equal rights as a first mortgage holder.
Why do people request second mortgages from a private lender?
The answer to this question is two-fold. The first aspect to understand is the need for borrowed funds. Common reasons include:
- Debt consolidation (combining a number of unsecured debts into a single monthly payment)
- Renovations to their existing property
- Obtaining a down payment to buy a second property, or to bridge a gap between selling and buying a principal residence
- Family debt & divorce
- Business investment (banks are particularly stringent when lending to business owners)
How is my investment taxed?
CRLI is a fully licensed mortgage administrator recognized by FSCO. We comply with all CRA requirements regarding tax reporting and audit. For the convenience of our investors we can provide a statement of earnings to assist with their annual tax filings. However, since all our investments are direct mortgage investments, there is a self-reporting obligation on each investor to self-report their interest income received from the borrower. CRLI does directly not report investment income to the CRA or issue a T5 statement. We advise each investor to consult an accountant to obtain proper taxation advice based on your specific circumstance. There can be no guarantee that the current tax position prevailing at the time of an investment will not change.
How long do I commit to the investment for?
The majority of our selected loans have a 12-month term. In the mortgage industry, this is considered a short term loan. Short term loans are preferred by private lenders because they protect the investor by limiting exposure to long term market volatility. On a case by case basis, we do occasionally offer 6-month and 24-month loans.
Regardless of term length, all of our mortgage agreements allow for renewal at the sole discretion of the lender(s). If the borrower(s) also wish to renew the loan for a second year, a 1% renewal bonus is paid to the lender(s).
The above notwithstanding, we advise that mortgage investments are generally illiquid. We recommend you do not invest funds which you may need urgently as the resale of mortgage investments is possible, but cannot be guaranteed.
Can the borrower pay back my mortgage loan early?
In most cases, the borrower pays back your loan by refinancing with another lender (usually an institutional lender at a lower interest rate). If this refinance happens before the end of your term, you are compensated for the fact that the borrower wishes to cut your investment short. Our loans are open which means the borrower is allowed to pay you back early, however, all loan contracts contain an early repayment penalty which is the lesser of 3 months interest, or the remaining interest due on the loan.
In practice, this means if a borrower wishes to pay back a 12-month loan after 6 months, the lender will receive an additional 3 months interest as a penalty, therefore earning 9 months of interest, in only 6 months’ time.
Alternatively, if a borrower wishes to pay back a 12-month loan in the 10th month, the lender will receive the remaining interest to term, meaning they will receive the full interest they would have earned if the mortgage paid out on maturity, despite the fact that the borrower has returned the lenders principal early.
Can I use my RRSP, RESP and/or TFSA accounts to invest?
Absolutely. CRLI Investments are fully RRSP, RESP and TFSA eligible. Speak with a representative for more information.
Can I split the loan with a friend?
Yes. You can split the loan with a friend, or we can fill the remaining share of the loan with another lender in our network.
Whenever more than one lender come together to extend a loan to a borrower this is called syndication. While this is more common in construction financing, we can use the same approach to split a loan into smaller shares at the preference of our lenders. (i.e. If the loan is requested for $120,000; 2 lenders could each take a $60,000 share, or three lenders could take $40,000 shares, etc.)
Since more effort and time is required to complete a loan in syndication, preference will always be given to a single investor taking sole share in a loan. That said, approx. 50% of our loans have more than one lender.
Do I have to pay any management fees to invest with CRLI?
Unlike mutual funds where fees are subtracted from your overall gain on investment, none of our fees are collected from the investor. While we do collect fees to manage and service the loans, all of these fees are paid by the borrower at the time of closing.
Who pays my legal fees? Do I need a lawyer?
We will provide you with a qualified third party real estate lawyer to represent your interests as the lender(s) to close the deal. Just like the management fees, legal fees are also paid by the borrower.
What are the lender(s) responsibilities during the term of the mortgage?
To be frank, not much effort is required from the lender(s) to participate in this type of passive investment. CRLI is set up as a full-service administrator, which means the investor(s) have their money work for them, and we do the rest. However, our operating model does require each lender to select and approve the specific investments that they wish to participate in. As such, there is a requirement to review deals and work with one of our staff to select the right investment based on each individuals investment objectives.
Aside from reviewing the deal opportunity and supporting documents (mortgage application, property appraisal, etc.). The lender is required to sign off on a FSCO (Financial Service Commission of Ontario) mandated disclosure document and a servicing agreement for each loan.
The lender can also expect to receive an email monthly with a statement detailing the latest interest deposits to their account, and an up-to-date PDF report on their current loan portfolio.
What happens if the borrower defaults on their loan?
A default can happen in two primary ways; either the borrower misses a mortgage payment throughout the term of the loan, or the borrower is unable to pay back the principal at the end of the term. Let’s discuss each scenario individually.
Missed Payment – We facilitate all payments electronically. Payments are withdrawn from the borrower’s provided bank account on the first of each month, clear our licensed trust account, and are deposited to the lender on the 7th of each month. The 7 day period of time is required to determine if any payments are returned due to insufficient funds. If so, no action is required from the lender(s). Lenders will be notified of the NSF occurrence and our admin team will proactively reach the client to collect the missed payment. Generally, we allow for 30 days of attempted collection (via contact by phone, email and postal mail) before proceeding with a power of sale enforcement.
The principal is not returned upon maturity – To mitigate against this, we generally send notice to the borrowers 60 days prior to maturity to initiate contact and encourage the borrower to consider their refinance options. At this time, the broker is likely already working with them on a new mortgage deal. (Generally, the mortgage brokerage remains in contact with the client throughout the entire term of the loan.) However, if for whatever reason the client does not have a new loan in place at the time of maturity, the mortgage is in default.
Whether a mortgage is in default due to missed payment throughout the term, or inability to repay at maturity, our first course of action is always to determine why this is the case. If the borrower wishes to stay in their home we always prefer to solve their problem and exit the lender’s investment with a new mortgage solution. However, in some cases the borrower’s financial situation or outlook has changed, and they can no longer afford to live in their current home. In this case, we generally encourage the client to list and sell the home themselves, and the principal of the mortgage is returned plus interest at the time of sale.
In the rare circumstance where a borrower is not cooperative or simply unable to meet their obligations under the loan, it is important for the lender(s) to understand they have the same rights as the bank, and our staff and legal team is capable of selling the property as stipulated by Ontario law using power of sale to recuperate the lender’s principal. It is important to understand that our business exists to facilitate loans from real people to other Canadians and that one’s inability to meet their mortgage obligation is generally a result of financial hardship. We often request patience on the part of our private lender’s as we work towards a win win solutions. All the while we recognize that protecting the principal of our lenders is paramount and remains our single biggest priority.
CONTACT US TODAY
Contact us to learn more about our fully-managed and secure mortgage investment opportunities. Or call us at 1-866-742-5363