There has been a lot of talk lately with Syndicate Mortgages and thought I would share my own opinion on these.
I have been approached and asked by one of these syndicate mortgage companies to incorporate this type of investment into my practice and promote to my clients. After carefully reviewing the contract and doing some research on the company, I politely declined given the nature of the risk to this product. I found that the company didn’t properly explain the risk and made it feel like a no-lose situation. Be careful with these… they offer a high rate of return because there is a high degree of risk associated to these products.
The question you need to ask is what happens to your money if a project doesn’t go as planned? You may be ranked behind other lenders and investors and may not get your money back because the value of the land is only worth enough to pay back these prior ranking lenders. While that is worse case, it is still a risk that should be disclosed. Instead, we see advertising and sales pitches using words such as “guarantee”, “safe” and “fully secured”. Typically, the higher the rate of return, the higher the risk of the investment.
Let me be clear, it’s not the syndicate mortgages that my concerns are with. They could be a great addition to a sophisticated investor’s diversified portfolio. My concern is around the regulatory gaps in the syndicate mortgage market along with how these are “sold” to potential investors. In my opinion, these investments are not suitable for the average investor.
I am not the only one who share’s this opinion. The Financial Services Commission of Ontario (FSCO) has issued a warning against syndicate mortgages. A statement that remains on the regulator’s website warns, “FSCO considers SMIs (syndicated mortgage investments) to be high risk, and notes they may not be suitable for the average investor.” Here is more information straight from FSCO https://www.fsco.gov.on.ca/en/mortgage/Pages/smi.aspx
I believe in a well diversified investment portfolio. A part of that portfolio could be real estate. I personally own an investment property along with REITs. Just remember the fundamental rule of diversification and don’t put all your eggs in one basket! The percentage of one’s investment being allocated to real estate should be based the individual’s personal circumstances, risk tolerance and need for liquidity.
If you were attracted to the syndicate mortgage as you felt they were a safe investment, you may want to consider segregated funds instead. These are like mutual funds but have an insurance component built into them. The insurance component can guarantee you up to 100% of your original deposit back after a set period of time or in the event of death. While these may not be attractive to everyone, many investors do like the peace of mind that these insurance products can offer.
If interested to learn more, here are some articles that support my opinion.
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By Jeff Romansky
CHS, CPCA Principal, SecurePlan Insurance Solutions
Jeff started his insurance career in 2006 by helping hundreds of insurance advisors grow their business by providing them with comprehensive advice, consultation and training. After nine successful years, he decided to take his knowledge and start his own practice to ensure his clients are getting the best advice. His office is based in Grimsby, ON and he serves clients throughout Southwestern Ontario and the GTA.