Canada’s banking system has traditionally been very well regulated and, as a result, has withstood pressures such as the global housing bubble. The same goes for Canada’s housing and construction sectors: well regulated, more resistant to collapse.
However, although this resistance to risk has its advantages, it can also stifle potential investment and growth. For example, the banking sector has been even more cautious in its lending practices after the global financial crisis, and the Canadian government — in part through the Canada Mortgage and Housing Corporation (CMHC) — has implemented measures to avoid a so-called housing bubble.
The market speaks
As with most sectors of the economy, the market will often determine the wisdom of various measures. And, with respect to mortgage investing and lending, the market is speaking, and the answer has been more private sources of real-estate finance as an alternative to the banks.
Of course, this turning to private sources of real-estate financing is not a bad thing. Indeed, it reflects the confidence sector investors have in the market. Borrowers are willing to pay higher interest rates to finance projects, while lenders are offering alternative sources of finance that are still relatively safe and low-risk in nature. It’s the kind of win-win situation most economic sectors are looking for, isn’t it?
An education process
Part of the challenge for private lenders is educating investors on how they differ from the banks, while at the same time ensuring the relative safety of the investment vehicle. There are a number of fundamental differences between bank mortgages and private mortgages.
First, the rules are different. Bank mortgages are generally insured, private mortgages generally aren’t — at least not yet. In addition, whereas with a bank mortgage, it’s the borrower that gets scrutinized, in a private mortgage, it’s the property itself that gets examined most closely. That’s because it’s the property that gets used as collateral in the mortgage loan, and what provides much of the security in a private mortgage.
ASCEND MIC is a mortgage investment corporation that specializes in offering investors high returns at low risk in Canada’s mortgages market. Please contact us to learn more.