Private Lending or MICs? Detailing the Differences Between Private Lending and MICs
At Nest Capital, we look to satisfy our investors and help borrowers by lending mortgage funds. However, many people are not aware of how we do it and how we are able to provide the results to our investors. This is why we had our COO, Chris Allinson clarify some aspects about Nest Capital as a Mortgage Investment Corporation.
Firstly, what is private lending and what is a Mortgage Investment Corporation? (MIC)
Private Lending is when one private lender, or an individual, funds a single mortgage with their capital. For instance, when a borrower needs a second mortgage against their house a private lender may lend the entire amount of the mortgage and receive monthly payments from that borrower. Common lending amounts range from $50,000.00 to $250,000.00 secured by that one residential property. Private lenders review the file with their mortgage broker and lawyer and handle all payment receipts, collecting and discharge statement preparations for compliance purposes. Private lending is lending funds on a single mortgage.
In contrast, a Mortgage Investment Corporation and the Mortgage Administrator are provincially registered and licensed mortgage investment and lending firms that enable investing in a pool of mortgages. Think of it like a pool of mortgages shared amongst a pool of investors but file review, paperwork, collections, etc are handled by the administrator. This is an alternative to traditional lending institutions like banks. MICs pool your investment across all of the mortgages.
What are the differences between investing in a Mortgage Investment Corporation (MIC) and privately lending money yourself?
While lending through a MIC, your investment is spread over many mortgages. MICs diversify an investor’s capital through many mortgages, in order to mitigate risk of loss and provide reliable and consistent interest payments to investors. The investor’s money is not assigned to any one mortgage but rather the entire pool of mortgages.
Issue of idle funds
When lending on a single mortgage (private lending), the lender personally looks out for their capital. They will have to find a new investment once that mortgage has been paid out. This can take weeks or even months and is therefore it is often not feasible to have the capital redeployed quickly. It can often be difficult to match the exact amount of funds that the lender has to the borrower requested mortgage amount.
Administrative and Collection burden
MIC managers handle the sensitive collection process should borrowers miss their payments, as well as renewals, discharges, mortgage statements, underwriting, dealing with appraisers, banking transfers within trust accounts, registered accounts such as TFSA and RRSPs funding paperwork, lawyers and mortgage brokers/agents. MICs relieve the administrative and collection duties from investors, as well as the stress that comes with it. It is often very important to accomplish all of these steps in a prudent and timely manner to avoid all kinds of problems.
MICs have experienced managers in the mortgage investment sector that will carefully review all documents, review properties and borrowers, manage your investment, and help protect your interests. This is an advantage to private lending as many lenders are not experienced and may let an unfit borrower use their money, not pay it back in a timely manner and this could result in higher risk and sometimes in loan defaults.
To summarize, these are the differences between private lending and investing through a MIC.