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I believe this might be the most important chapter in this program!
You can learn everything there is to know about Arm's Length Mortgages. You can take your time to assess borrowers, and properties alike, set high rates of return and charge lender fees to earn higher returns on your investments, but if you don't take the time before jumping in to set your own boundaries and guidelines for how you want to manage your investments, and outline where your thresholds are- you are missing a huge piece of the puzzle and ultimately risking much more than you realize.
I like to think about it from the perspective of going house shopping.
With every client I work with we begin with an application and pre qualification process. I determine their maximum borrowing power based on multiple factors such as income, credit, down payment and overall debt load. This gives me their maximum spend amount based on government debt servicing requirements, but at this stage I keep the details to myself.
From this point I like to have the conversation with my clients around their personal comfort levels with respect to monthly payments on the mortgage, property taxes, condo fees and their outstanding and remaining debts, plus utilities and other household expenses.
We then come together with their maximums and their personal thresholds for comfort. It is a combination of these two reviews that ultimately will determine where their pre qualification numbers land. Just because they can TECHNICALLY afford a payment based on government guidelines, doesn't mean that number will truly work for them or put them in a reasonable financial situation.
The same can be said regarding investing your registered and tax free account funds into Arm's Length Mortgages. Just because you have $300,000 in your RRSP accounts doesn't necessarily mean you should lend all of those funds out into mortgages.
Outlining goals for your financial future, as well as limits and thresholds that have you comfortable with your lending choices is extremely important. Opportunities arise for these types of mortgages all the time if you know where to look- not every one of them is right for you.
Download WORKBOOK ONE and start to work through to assist you in setting these goals, limits and thresholds for securing your financial future intelligently.
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Nothing in life is free, most everything comes with a cost at some point. It is important to know the costs involved with investing in mortgages at the onset.
As we discussed in the first module, to be able to lend your RRSP and TFSA funds out within private arms length mortgages you must have your funds held within a self directed account. Another name for these self directed accounts is a “discount brokerage”, because you get discounted rates and fees compared to full service brokerages where a Financial Planner is handling your accounts and investments for you.
While these fees are discounted from a full service company, they are still here and relevant, and can add up over time if you are not careful or cognizant of them. Discount brokerages, or investment companies have a clear section of their website that will outline their fee structure for every imaginable cost you might incur. It is important to recognize that these fees are not only present when you lend your funds in a private arms length mortgage, but there are typically monthly fees and annual fees just for holding your accounts within the firm because a company such as Olympia Trust is administering your account the entire time it is holding funds on your behalf.
These are important costs to know and keep handy for when you do lend funds out, as they should come into play when you are deciding what your mortgage deal might look like when an opportunity arises. You ideally want to be covering yoru administration costs with each mortgage deal that you lend on so that you are making money, not spending it while investing. The beauty of these private arms length mortgages is that you make the rules, and you decide what your return on investment (ROI) is going to be.
Some standard costs and fees to be aware of when starting your overall private mortgage investment journey are:
account opening fees
monthly administration fees
annual administration fees
investment fees
transfer in/out fees
mortgage placement fees
pre authorized payment fees
document fees
annual mortgage fees
monthly mortgage fees
gst on administration fees
For the purposes of this program I am utilizing OLYMPIA TRUST COMPANY and their information as they are the company I personally have dealt with for over 10 years now, and the one that I find to be the most useful, helpful and generous with their time and information when dealing with a self directed account investment company.
Click HERE and join me as I take you through their back end client portal and we review some of the common fees
You can also download a copy of their FEE SCHEDULE for a comprehensive list of the costs and fees you may run into by utilizing their company as your self directed accounts administrator. You will need this document as you work through your workbook for this section.
Every company that administers self directed accounts is going to have their own fee schedule, this is just a jumping off point.
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Such as which bank you choose to deal with on a regular basis for your basic banking needs, it is also your choice in which company you utilize to hold your self directed RRSP and TFSA accounts. Just as banks, there are many to choose from, and it is a personal decision as to which one(s) you decide are the best fit for you.
As mentioned in previous chapters, I personally use Olympia Trust Company as they are extremely helpful and generous with their information, especially when it comes to Arms Length Mortgages.
There are a number of things to contemplate and ponder when picking a company to place your funds with:
1. Do they allow investing in Arm’s Length Mortgages? This will be your number one deciding factor. If they do not, their accounts are not going to help you achieve your goals because you will not be able to invest in what you want.
2. Reputation. Do some background research, get feedback from others, check google reviews. Read a lot of them.. this is one of the best ways to get a general picture of how a company runs and if it is a right fit for you. Likely if others have had issues, you may as well.
3. Fees + Costs involved. Dig into their fee schedules and overall costs for maintaining the accounts, as well as for administering mortgage transactions. You may not always have funds being lent out in an Arms Length Mortgage to cover the admin fees, which means that you will have recurring monthly fees in the times you aren’t actively brining investment funds into the account. High fees can take their toll over time.
4. Ease of use of their system. How easy or complicated is it to use their Onlien portal? Do they have an online portal? Do they have a team that helps with the mortgage set up process, or are you completely on your own? Sometimes paying higher fees, for access to assistance when you need it makes all the difference in the world. You want to make money, and not have to pull your hair out for it!
Some of the available choices in Canada are listed below. This is by no means a comprehensive list, but a few to start you off on your research journey in finding the company that suits your needs and goals best.
Now is a good time to start investigating companies and looking at the process for transferring funds over to your choice of self directed company/trustee. This is especially important if you are thinking you’d like to dive into lending sooner than later. You always want to make sure that your funds are available for use when an opportunity comes along.
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When presented with an opportunity for lending your RRSP + TFSA funds out in a private arms length mortgage, it is important to have a thorough review process that you work through each time. Not only will this allow you the time and space to gather the information needed, but will also allow you to see where the strengths and weaknesses of the opportunity might be. Over time you may choose to streamline your process, and it may become easier for you to determine whether an opportunity is right for you without all of these steps, however I would still suggest keeping some kind of formal process for your review and assessment to ensure that you are always looking at opportunities through the same discerning lens.
It is this review that will ultimately determine whether you move forward with the deal and lend out your funds.
Below I am going to share with you my personal process for reviewing a private mortgage opportunity that has been created using a combination of personal experience in lending out funds along with my professional experience as a Mortgage Broker over the last 16 years and how I underwrite and review client files on a daily basis when submitting to lenders across the country for approvals.
However before I break all of that down, join me HERE as I take you through some additional considerations and through processes that you may find helpful when beginning to look at opportunities of your own.
STEPS TO ASSESSING AN OPPORTUNITY
Application: The formal application processes where the client completes a templated application form that will outline their current financial landscape with all relevant personal details ranging from the basics of legal name, date of brith and address information. It will then move through income and employment, debts and liabilities, current findings in place and properties owned.
The application is extremely important for obvious reasons- it provides all of the clients relevant details for you to review. Where I find this even more important is in comparing the details in the application to the credit bureau when on hand. There is a lot of insight to be gained when the details from one do not match the other, of the applicant is unaware of any of the details you are asking for- this can be quite telling as to who they current look at, and respond to their financial situation as a whole. This is also where you can start to detect fraud in some cases.
Join me HERE as I walk you through my application system and process an application intake for a past deal that I lent my own TFSA funds out on. This will help you to get a better understanding on the information you want to get from borrowers up front, and the importance of each piece of information gathered.
Credit: If working with a broker as an intermediary you may be provided credit details with application submission. It is part of the Mortgage Brokers job in their initial review to verify credit details and outline within the application, but it is still imperative that you do your own review as well.
If you are working alone, and sourcing your own private arms length mortgage opportunities you will need to request a copy of a recent credit report from the borrower directly. Make sure you are familiar with how to read a report, and decipher the information you are viewing.
When reviewing credit score and history it is important o note missed and late payments, any derogatory items such as collections (outstanding or previously paid), consumer proposals and bankruptcies. How a borrower manages their credit is going to be a huge indicator of whether or not they can and will make their mortgage payments on time and consistently.
Do keep in mind that one of the reasons this borrower might be looking for private financing is indeed because they have credit issues, and this is why it is important to understand what to look for, and to ask questions that will help you to understand the story behind the issues you find.
Basic/Preliminary Review: The basic review starts with comparing the application details with the credit bureau details and doing some basic math to determine loan to value, ensure the mortgage request falls within your thresholds and limits, determine if an additional lender is required or if you can service on your own, and ensure you are comfortable with property location details, marketability etc.
Join me HERE as I walk you through the review of credit and application and determine what merits the overall opportunity has to work with. This video will assist you in understanding what areas of the opportunity to focus on, and where importance lies within the overall file in general.
Documentation Request: Some lenders like to request documents up front with the application- this is your choice. Personally I do like to see the application first because a million emails with documents I may not need is a hassle! By first doing a quick review you can determine:
1. Do you want to look at the deal further?
2. What documents do you want to see based on the details of the application.
3. Is the client willing to provide what you are asking for?
4. Do you see any red flags within the paperwork provided?
Comprehensive Review: It is within your comprehensive review that you will really break down the application, credit, properties details and start to work on debt servicing ability, appraised value of the property in question, and determine your potential rates, fees and total cost of borrowing with terms and conditions attached.
In the comprehensive review you will utilize the 5 C’s of Credit, and the standard mortgage Gross Debt Servicing (GDS) and Total Debt Servicing (TDS) calculations to help you make an educated and informed decision.
This is also where you will begin to formulate what the deal looks like from the perspective of risk level involved and set your rates, terms, fees and conditions accordingly.
Exploring the 5 C’s of Credit
Join me HERE as I outline the 5 C’s of Credit to provide a better understanding of the areas that we want to review and dig into when assessing a client file. The 5 C’s are going to be your framework for assessing potential opportunities going forward.
You can also download a summary of the 5 C’s of credit HERE. This will also be included in workbook two and as part of your Opportunity + Assessment package that will be provided at the end of the program.
Exploring Debt Servicing (GDS + TDS)
Join me HERE as I explain the basics of Gross Debt Servicing and Total Debt Servicing Ratios in relation to assessing your potential opportunities and determining your borrowers realistic ability to repay their mortgage request.
You can download the GDS and TDS formulas HERE to keep handy for reference, and they will also be included in your Workbook as well as your Opportunity + Assessment Package at the end of the program.
*** It is also a good idea to check your hand written math against a pro forma calculator for GDS and TDS ratios… so I have included here a link to the CMHC (Canada Mortgage and Housing Corporation) website’s calculator HERE
Commitment/ Decline: The commitment stage comes once you have decided that you want to move forward with the opportunity.
You will need to provide a Letter of Commitment to the borrower or the broker facilitating the transaction which outlines all of the relevant details and any further requests or documentation that you require to continue to move forward in offering financing.
If you decide that you do not want to lend on this opportunity as presented, you can choose to decline the application. You can do this verbally, but I usually suggest a written Letter of Decline to keep things professional and to outline to the borrower why they have been declined so that they are aware.
*** There is also an in between where you could decide that the deal as presented is not something you can lend on but with some adjustments you would be willing to look at it again, and then provide the borrower with your list of requests, almost like a pre approval.
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There really are no rules when it comes to setting your terms and conditions, other than ensuring that you follow the basic guidelines set out by your trustee company (Olympia Trust for example). Each company will have an outline for you to follow.
It is a good idea to know what additional documents you will need to fulfil the trustee company requirements when setting up the mortgage. While this could technically be done after the commitment, I personally like to include these conditions as part of my commitment so that the client can see all requests up front and isn’t surprised by additional requests for paperwork work signatures later in the process. You may also notice that some of the trustee required documents are similar or the same as some of the documents you are going to want to request yourself.
You can review the one provided on the Olympia Trust website with me HERE as I walk you through each point and go into further detail.
This document can also be downloaded and saved or printed: Mortgages - Required Documents for Funding
The following are some important considerations to have when creating your own terms and conditions. keep I mind that you may like to have the same ones for each file, or they may change slightly from file to file.
1) Are the clients rate sensitive or fee sensitive? Often clients lean one way or the other, and so its important to be able to adjust where you earn your return tho that it looks favourable to the client as well. If your client is fee sensitive, you could increase your overall interest rate and reduce your fee. In the end if you adjust properly you earn the same return on investment, it just looks different on paper as to where its coming from. For example, if your goal is to earn a grand total of $25,000 from your opportunity over 1 years, you could play around with a high fee of $10,000 and then determine what the rate needs to be in order to make up the remaining $15,000 in interest payments and vice versa.
2) Ensure you account for admin fees. You will need to review yoru trust company admin fees for the term of the mortgage and then decide if your rate and fees account for this, or are you planning on charging a separate admin fee to cover off these costs?
3) Legal fees are two fold on private mortgages. As the lender you need to have a lawyer that will draw up the draft mortgage with the terms from your commitment, and once that is done the client also needs to have a lawyer complete their part of the transaction which is the closing portion. Do you want to use the same laser on both sides? Do you want the client to retain their own lawyer of choice? Are you expecting the legal fees for the set up to come out of your pocket, or is the client to pay this fee as another part of the cost of borrowing?
4) What are current mainstream lending interest rates for similar terms? This can be a good jumping off point for where your rate should be as a bare minimum.
5) What are current rates of return for other types of investments at the moment? Do you have a financial planner you could speak with about current GIC, Mutual Fund and other such rates to get an idea of the market?
6) How long are you comfortable with not having access to this money? Once the mortgage is in place and set up for a specified term, it is a contract and needs to be honoured. You cannot just pull out for any reason because you need the money for something else.
7) Are you familiar with the lending area where the property is located? Do you need to speak with someone who knows the area better?
8) If the client has credit issues will the term you chose be enough time for them to realistically fix these issues and rebuild? Do you have requests of the borrower to ensure they take the steps they need to move back to mainstream lending after your term ends? Do they have an exit plan or strategy in place?
While this isn’t a comprehensive list, these are some of the considerations that are top of mind for me when I am lending out my own funds to borrowers on private arm’s length mortgages.
It is also important to note that the trust company is going to have certain requirements for these mortgages to ensure they fall within government and company guidelines.
Join me HERE as I take you through the Olympia Trust portal and cover the general requirements as set out by them.
This document can also be downloaded and saved or printed: Mortgages - General Information + Requirments
*** Remember that each company will have slightly different requirements, this video and the following pdf download are for reference only, be sure to check with your trust company to be sure you are on the right track.
Once you have laid out your terms and conditions you are ready to create your Letter of Commitment to present to your borrower. It is this letter of commitment that will outline all of your terms and conditions in an easy to read format the borrower can review and make a decision about moving forward with. Typically the letter of commitment is not a legally binding agreement, but your offer to the borrower with set requirements they will need to meet in order to move ahead with financing. I usually set an expiry date on the commitment that the client must sign and return by a certain date, and then provide additional documents by another date. This creates a sense of urgency for the client, and also ensures that you do not miss out on other potential opportunities by waiting weeks on end for an answer.
Join me HERE as I walk you through the Letter of Commitment pro-forma document that comes with a fancy excel spreadsheet complete with formulas for calculating APR and client payment amounts based on your lending offer.
You can view a sample Letter of Commitment HERE to get familiar with the detaisl contained within. This document is not a requirement to be used when lending, however I do recommend utilizing a formal commitment package if at all possible.
You can view a working copy of the excel spreadsheet document complete with formulas embedded HERE to play around with when working through your sample opportunity within your workbook.
***Fully working and active versions of both of these documents will be included as part of your Opportunity + Assessment Package available for download at the end of the program.
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Once you have completed your assessment and decided to commit to lend funds to the borrower, you will need to complete your verification of documents requested.
There is no right or wrong way to do this, its up to you to feel comfortable with the borrower, the rates. terms and fees set out, as well as the conditions you have requested and the verification of them. Remember… you make the rules for what you want to see and verify.
Once you have thoroughly verified your documents and are ready to move forward with the financial transaction, you will need to confirm that you have met all requirements of the trustee company that you have chosen to work with, one of those requirements is going to be the “draft mortgage” creation by your solicitor.
THE DRAFT MORTAGE
In order to get a draft mortgage completed, the lawyer will have some requests of you for details and information pertaining to the financing request to be registered on title.
Ensure that your Letter of Commitment outlines all terms and conditions for the mortgage, the rates, and fees involved, along with legal addresses and details of the borrower and property in question, and that it is signed by all parties.
I usually like to also include a Letter of Direction in this package to the lawyer (signed by the client and myself) outlining the lender and broker fees involved and how they are to be paid out at the closing of the transaction. This ensures that your broker (if applicable) and yourself receive payment for any fees requested through the placement of the mortgage. Always have this signed by the client prior to meeting with the lawyer as you do not want the client to walk away with extra funds they shouldn’t have on hand. Its a lot harder to get funds back after the fact than have them set aside by the lawyer at the onset.
You can view a sample copy of a Letter of Direction HERE and I have also included a blank copy in your lender assessment package within your workbook for future use.
Keep in mind here that the creation of the draft mortgage by a lawyer is going to be at a cost. Whether this is a cost you pay as part of the process of doing these mortgages, or you pass it along to the client as part of their fees.. be sure you have this arranged prior. Personally I always add this cost to the back end admin fees charged to the client when processing the deal, and mark is as “legal fees/admin- lender” on the commitment so that all parties are aware.
Once the draft mortgage is completed and sent to the trustee company along with all of the other required trustee company documents, the process is pretty smooth sailing, and the trustee company and/or lawyer will reach out for any clarification or additional requests that have been missed.
Download WORKBOOK TWO where you will get an opportunity to review and assess an opportunity that I successfully lent out my own TFSA funds on in 2022. At the beginning of the final module I will share with you the actual terms and conditions I offered this client, and how I made my decision.