Private Mortgage Lending: A Fresh Approach for an Old Strategy with New Opportunities

Private Mortgage Lending
By: Brian Menges, President, Caplink Financial Corporation
Private mortgage lending has a storied history in the portfolios of many Canadian investors that look to alternative investments as a means of generating passive income; but in recent history this asset class hasn’t been as relevant as it once was. At Caplink Financial Corporation (“Caplink”), we believe this is about to change. By innovating into evolving market conditions with the launch of our new Caplink Mortgage Trust (“CMT”), we plan to usher in the next era of private mortgage lending by taking a new approach to the old strategy.

Rebirth of the Private Mortgage Lender

The most common pooled investment vehicle for private mortgage lending – mortgage investment corporations or “MICs” – are constrained by provisions of the Income Tax Act (Canada) that homogenize the industry by requiring MIC portfolios to be made up primarily of residential mortgage loans secured against Canadian real estate. During the past decade, a period of unprecedented low interest rates in Canada forced many MICs to respond by either lending at low rates to remain competitive with quality borrowers or exposing the portfolio to high-risk and insufficiently collateralized loans that introduced too much default risk to their funds. In over 18 years managing and administering our two MICs, Caplink chose to prioritize capital preservation recognizing that markets evolve over time and low rates wouldn’t last forever. Serving our investors’ needs and objectives forms the backbone of our role as manager and with discipline comes opportunity.
As the Prime Lending Rate in Canada returns to rates not seen since 2008* , quality borrowers are again taking on mortgage debt at attractive rates to lenders. Coupled with policy changes to federal regulations not applicable to private lenders that require borrowers to qualify for their mortgage at the contract lending rate plus 2%, the time of easy access to low-cost mortgages at a borrower’s neighbourhood bank branch has become a thing of the past. Caplink is a licensed Mortgage Broker in Alberta, British Columbia and Ontario, and a Financing Corporation in Saskatchewan, and we are positioned to service these borrowers with our experienced team as they return to the alternative lending space.

New Opportunities with Innovation

Globalization and demographic shift have changed how and where Canadians own real estate. For many, a vacation home or rental property somewhere warm is part of their retirement and remote working plans; yet for various reasons non-resident foreign national borrowers in these markets are a huge and under-serviced demographic. The National Association of Realtors estimates that Canadian non-resident foreign nationals currently own in excess of $125 billion USD in U.S. residential assets of which as much as $85 billion USD is estimated to be clear title.**
Canadian buyers have also been looking further south to Mexico due to a lower cost of living, and attractive exchange-rate. In Mexico mortgage interest rates for resident borrowers are extremely high with prime bank mortgage rates ranging between 9.6% (Scotiabank) and 14.1% (BBVA)***. Options for bank financing to non-resident foreign nationals is virtually non-existent.
Over the past 2 years, Caplink has taken note of these changes and strategically positioned itself to take advantage as we enter a new normal of mortgage lending. In 2020, Caplink Mortgage Corporation (“Caplink USA”) was formed to facilitate expansion into the U.S. Caplink USA is licensed as a Mortgage Banker in Arizona, California, Colorado, Florida, Illinois, Texas and Washington, and as a licensed Mortgage Broker in Pennsylvania. According to the National Association of Realtors 84% of real estate owning Canadian foreign nationals own property in Florida (45%), Arizona (23%), California (12%) and Washington (4%), which collectively represents some 77,078 homes worth over $105 billion USD.2 We have also worked extensively with legal and professional advisors in Mexico to establish a mortgage lending framework for foreign nationals acceptable to our risk profile.
These preparations culminated in December of 2022, when Caplink’s two MICs were amalgamated to form Caplink Mortgage Trust (“CMT”), a mutual fund trust not constrained by the MIC provisions of the Income Tax Act (Canada). This will allow us to take advantage of rising interest rates and expected demand for non-prime mortgages while simultaneously expanding our geographic reach to lend to underserved and typically affluent Canadian borrowers abroad. Unlike a MIC, CMT will finance mortgages in Canada, the U.S., and Mexico. In Canada and the U.S., we will provide fixed term, bridge, fix & flip and ground-up construction mortgage financing to qualifying borrowers. In Mexico, we intend to provide fixed term lending only.
With these changes, we believe we are the only mortgage lender of our kind in North America. CMT is poised to continue as a Canadian non-prime lender while expanding to pursue multi-jurisdictional mortgage lending and take advantage of unnecessary barriers to international homeownership in the U.S., Mexico and Canada: barriers that create a form of mortgage arbitrage where, by virtue of being a non-resident in a foreign country, good quality borrowers are forced to take lower loan to value mortgages while paying higher mortgage rates than they would for similar transactions in their home country.
We are excited to work with Raintree Financial Solutions to help us grow this strategy. CMT is expected to be available to Raintree clients starting in February 2023.
Caplink is registered in Alberta, British Columbia, Saskatchewan and Manitoba as an Exempt Market Dealer, and in Alberta and British Columbia as a Restricted Portfolio Manager and Investment Fund Manager. DISCLAIMER: This article is not intended to provide financial or suitability advice nor does it constitute an offer to sell or engage in investment activities. Individual situations will differ and should be discussed with your Dealing Representative or Advisor. 
**National Association of Realtors – 2022 International Transactions in US Residential Real Estate