A continuous growth in syndicated mortgage sales volume reflects the increasing popularity of this arrangement in Canadian condo markets, according to an analyst who questions the safety of these investments
Figures released by the Financial Services Commission of Ontario (FSCO) revealed that sales of syndicated mortgages for condo units in the province reached nearly $4 billion in 2014, the latest year with available numbers.
In an analysis piece published by Maclean's on Monday, senior business and finance writer Chris Sorensen observed that this number is reflective of the rise of syndicated mortgages, where hundreds of individuals decide to lend money to a developer “in exchange for a fixed annual interest rate of between eight and 12 per cent over a term of two to five years.”
Sorensen noted that this arrangement presents plenty of advantages for would-be investors, especially since each of them would need to lend as little as $25,000.
“Unlike other pooled real estate investments, syndicated mortgages allow investors to pick which projects they want to be involved with and secure their portion of the mortgage on the property in question. If the project performs well, investors may be eligible to receive extra payouts. If it goes bankrupt, investors can theoretically recover the principal amount of their loans following the sale of the property,” Sorensen explained.
The analyst attributed the increased popularity of the set-up to regulatory changes implemented in 2012.
“When banks began to impose more restrictive borrowing requirements on condo developers four years ago amid concerns of overbuilding, that spurred demand for alternative sources of capital to help finance projects,” Sorensen wrote.
However, since the money is primarily used for expenses involved in pre-selling a sufficient number of units to secure bank financing (including permit applications and sales centre building), syndicated mortgages are nowhere near a “safe” option for investors.
“Even in a hot market like Canada’s, there are no guarantees a given condo project will get off the ground, regardless of how quickly buyers snap up the units,” Sorensen warned, adding that buyers should be highly cautious of the possibility that they might not even get their funds back in the first place.
“If something goes wrong with a project, syndicated mortgage investors are subordinate to banks and other primary lenders, meaning they’re further back in line for repayment—assuming there’s enough money left over after other lenders have received their share,” the analyst said.
In an analysis piece published by Maclean's on Monday, senior business and finance writer Chris Sorensen observed that this number is reflective of the rise of syndicated mortgages, where hundreds of individuals decide to lend money to a developer “in exchange for a fixed annual interest rate of between eight and 12 per cent over a term of two to five years.”
Sorensen noted that this arrangement presents plenty of advantages for would-be investors, especially since each of them would need to lend as little as $25,000.
“Unlike other pooled real estate investments, syndicated mortgages allow investors to pick which projects they want to be involved with and secure their portion of the mortgage on the property in question. If the project performs well, investors may be eligible to receive extra payouts. If it goes bankrupt, investors can theoretically recover the principal amount of their loans following the sale of the property,” Sorensen explained.
The analyst attributed the increased popularity of the set-up to regulatory changes implemented in 2012.
“When banks began to impose more restrictive borrowing requirements on condo developers four years ago amid concerns of overbuilding, that spurred demand for alternative sources of capital to help finance projects,” Sorensen wrote.
However, since the money is primarily used for expenses involved in pre-selling a sufficient number of units to secure bank financing (including permit applications and sales centre building), syndicated mortgages are nowhere near a “safe” option for investors.
“Even in a hot market like Canada’s, there are no guarantees a given condo project will get off the ground, regardless of how quickly buyers snap up the units,” Sorensen warned, adding that buyers should be highly cautious of the possibility that they might not even get their funds back in the first place.
“If something goes wrong with a project, syndicated mortgage investors are subordinate to banks and other primary lenders, meaning they’re further back in line for repayment—assuming there’s enough money left over after other lenders have received their share,” the analyst said.
