How do you lose money investing in a private mortgage?

The beauty of investing in private mortgages is that every dollar you invest is secured by more than a dollar of real estate. That doesn’t mean you can’t lose your money, but it does mean that you’ll never wake up one day to a news report that says, “the market has crashed, and it’s all gone.”

Imagine a complete stranger asked you to borrow $1,400. How quick would you be to say no? I mean, we’re talking about a complete stranger. All your fear alarms about losing your money would go off, wouldn’t they? Congratulations…you’re normal. Lol.

But what if the stranger offered you an ounce of pure gold to hold onto until they paid you back the $1,000, they need to borrow plus 10% interest? And let’s assume you can verify that the gold is actually gold – that’s obviously very key. Then how would you feel?

At the time I’m writing this, an ounce of gold is worth about $1,750 and $1,400 is 80% of that. Add on the interest of 10% and the loan plus interest is $1,540 which is 88% of the value of the gold. Now, how fast do you think you could sell an ounce of gold that is worth $1,750 for $1,540? I don’t think you’d have to go very far to find a buyer, would you?


That’s the power of highly marketable collateral and in private mortgages the real estate is the gold. I bet you’d agree that like gold, we can agree on what a house is worth at any point in time and that its fairly easy to sell. Those are the two factors that make for great collateral. When the collateral is worth more than the loan itself plus the interest the Borrower agrees to pay you, then the risk shifts from you to them.

So how does it all go wrong? Well, a few things would have to happen and what’s really important is to understand that they all have to happen at once to create a loss. Let’s look at the gold example again. First, the Borrower would have to default on their obligation to pay you. If that happened on its own you don’t lose anything, but in order to recover your investment you would have to find a buyer for the gold – your collateral.

So, let’s say you went to sell the gold. You would only realize a loss if the gold was no longer worth $1,540 AND you agreed to sell it at that lower price. Don’t forget, you don’t have to sell the gold. You could also choose to hold the gold in the hopes that it would regain its value over time. Also, keep in mind that you only lent the Borrower $1,400 so while you would like to recover your principal investment plus interest, you could sell the gold for as little as $1,400 and avoid actually losing money.

The point is you have a lot of outs here. It’s very difficult (but not impossible) to lose money when you invest with marketable collateral securing your investment. The Borrower has to default on their obligations (which is rare with mortgages – historically only 1 in 400 Borrowers default on their mortgage in Canada), and the property that secures the loan must be sold for a price significantly lower than the value of it when you made the loan.

At Magnetic we only lend Borrower’s a maximum of 80% of the current value of their homes for 1 year at a time, so you can imagine what has to happen to the value in a (relatively) short period of time in order to create this type of problem. Not only that, but real estate has also proven to be very resilient in that even when values drop, they tend to recover quickly. There are no guarantees, but history is a pretty good indicator of future performance.

Private mortgages offer Investors more security than other traditional, popular investment vehicles and they also pay generally higher returns that are more predictable and consistent. They may be the most boring investment in your portfolio, but they’re also likely to be the one you can count on the most to get you where you want to go.

Book a FREE consultation on the site now and get your questions answered. Unless your current portfolio is earning better than 8% per year with consistency and peace of mind, you have nothing to lose and a lot to gain by getting in the know.

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