The arrangement presents the risk of buyers not getting their funds back should a condo deal go south, according to a Maclean's analyst
The emerging trend of syndicated mortgages for Canadian condominium units might appear to be convenient for would-be investors, but Maclean's senior business and finance writer Chris Sorensen argued that the arrangement is a high-risk choice that might even upend the market in the long run.
A syndicated mortgage involves hundreds of individuals lending money—in some cases even as little as $25,000—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.”
The popularity of the set-up is such that in Ontario, it has garnered nearly $4 billion in sales in 2014 alone, the latest year with available numbers.
However, Sorensen noted that much of the money in a syndicated mortgage goes to expenses for the development and pre-sale of enough units to convince banks to provide financing. The analyst said that this presents the risk of buyers not getting their funds back should the deal go south.
“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 wrote in an April 4 piece published on the Maclean's website.
“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,” he added.
The analyst cited the observations of Toronto-based mortgage broker John Bargis in proving why the present wave of syndicated mortgages isn’t sustainable in the long run.
“I’ve been exposed to multi-million-dollar projects where things have gone bad really fast. It’s not because it’s not a viable project, but there’s just so many moving parts. You’ve got construction managers, contractors, builders—so many things that can go wrong from an investment perspective or a sales perspective,” Sorensen quoted Bargis as saying.
Despite the dour prospects, Sorensen acknowledged that syndicated mortgages would remain popular among enterprising individuals for the foreseeable future.
“The myriad risks explain why syndicated mortgages pay interest rates approaching double digits at a time when a five-year Guaranteed Investment Certificate, or GIC—a truly ‘safe’ investment—offers only 1.5 per cent annually for a five-year term,” he said.
A syndicated mortgage involves hundreds of individuals lending money—in some cases even as little as $25,000—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.”
The popularity of the set-up is such that in Ontario, it has garnered nearly $4 billion in sales in 2014 alone, the latest year with available numbers.
However, Sorensen noted that much of the money in a syndicated mortgage goes to expenses for the development and pre-sale of enough units to convince banks to provide financing. The analyst said that this presents the risk of buyers not getting their funds back should the deal go south.
“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 wrote in an April 4 piece published on the Maclean's website.
“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,” he added.
The analyst cited the observations of Toronto-based mortgage broker John Bargis in proving why the present wave of syndicated mortgages isn’t sustainable in the long run.
“I’ve been exposed to multi-million-dollar projects where things have gone bad really fast. It’s not because it’s not a viable project, but there’s just so many moving parts. You’ve got construction managers, contractors, builders—so many things that can go wrong from an investment perspective or a sales perspective,” Sorensen quoted Bargis as saying.
Despite the dour prospects, Sorensen acknowledged that syndicated mortgages would remain popular among enterprising individuals for the foreseeable future.
“The myriad risks explain why syndicated mortgages pay interest rates approaching double digits at a time when a five-year Guaranteed Investment Certificate, or GIC—a truly ‘safe’ investment—offers only 1.5 per cent annually for a five-year term,” he said.
