Most people think of mortgages as loans you get from a bank in order to purchase a house. This is the experience most homeowners probably have with a mortgage. Yet mortgages can actually be a bit more complex. Not only is the definition of a mortgage broader, so too are the investment options associated with mortgages. Let’s take a closer look.
What are private mortgages?
First, a mortgage doesn’t have to be issued by a bank. There are countless private mortgages that exist in the marketplace; often overshadowing those offered by banks. In essence, a mortgage is nothing more than a loan made to a property owner in exchange for interest payments — with the property itself acting as collateral, or security for the loan.
In Canada, countless private mortgages are issued for both residential and commercial real estate. If you think this constitutes undue risk in the marketplace, think again. Rules are in place in Canada which essentially ensure the safety of private mortgages. There are rules regarding how much exposure to risk is involved, and historically speaking, private mortgages in Canada have been a secure and steady source of real-estate financing.
Taking advantage of mortgage investments
In fact, the mortgages market has been so stable in Canada that entire new classes of investments have been built around it. For example, mortgage investment corporations (MICs) have been around for decades, but have only recently become popular as a result of Canada’s booming housing, construction, and real-estate sectors. Mutual funds focusing on mortgages, as well as income trusts involving mortgages, are two more examples of investments made in the sector.
At the heart of investing in mortgages is taking advantage of the relatively high interest rates involved. In other words, property owners are usually willing to make high interest payments in exchange for the principal in a loan. So, private investors can take advantage of this by issuing mortgages themselves, or by investing in MICs or other funds in which the expertise in mortgages management comes from the fund managers themselves.