Flexibility is at the core of private lending. As businesses in this industry primarily lend their own or their investors’ capital, they can offer loan products beyond the confines of banks and credit unions. There is a need for private loans of all types in Canada, and private lending can be lucrative when done correctly.
Private loans can be structured in different ways, depending on what the borrower and lender agreed upon. Components of a loan include:
- a principal amount (how much is being loaned)
- an interest rate
- a maturity date (when the loan needs to be repaid).
In private lending, a loan is secured against real estate through a mortgage.
By law, lenders may not charge more than 60% interest annually, including all fees, costs, and interest the borrowers pay to get the loan. Each province also has its own rules regarding lending, real estate, and mortgages. Check with your local guidelines.
Here is a roundup of each capital lending structure in Canada and how they function.
Syndication
A syndicated mortgage is funded by multiple private individuals for a single borrower. If you are a private lending company, you need to be licensed in order to put investors on the title of the mortgage (syndication). The investor is responsible for collecting the money from the borrowers.
Mortgage Investment Corporation (MIC)
MICs pool together funds from investors to fund a variety of different mortgages, helping to mitigate risk. MICs’ investors receive interest income.
General Partnership / Limited Partnership (GPLP)
A GPLP is similar to a MIC in its overall structure. They don’t sell shares, they sell units, so they deal with partners who put the money in (the investors). The general partner is the person, group, or entity who is responsible for all investment activities on behalf of the limited partners. The general partner may also be called the “sponsor”, the “key sponsor,” the “promoter”, or the “developer.” The limited partners, or LP investors, are passive investors who contribute capital to the real estate deal. They don’t necessarily need to have experience in real estate, as they rely on the expertise of the GP. This structure usually takes place when managing large, complex real estate deals.
Private mortgage lenders provide different products for various reasons to borrow money. Here are some of the areas that private mortgage lenders specialize in:
- Bad Credit
- Refinancing for Debt Consolidation
- Renovations
- Residential, Commercial, Construction, Agricultural, or Industrial
There are many different ways to lend money and structure lending. Check with your local guidelines and always follow best practices to stay above board.
