Do you know who the biggest property investors are in Australia? It’s the banks. Australian banks have trillions invested in the Aussie real estate market. They don’t invest by purchasing property though, they invest by lending money to people who want to buy property.
It’s a smart move by the banks. They don’t have the risk of owning property which could lose value, they don’t have to pay stamp duty or land tax and don’t have to worry about maintaining the property. And they make great profits through the interest rates that borrowers pay.
But did you know that you can invest in property the same way that the banks do?
It’s called private mortgage lending.
What is a private mortgage?
A private mortgage is just like bank mortgage where a loan is secured by a mortgage over a property. The main difference is that the money is typically sourced from private investors.
What is the difference between a private lender and a bank?
Private lenders look at a loan application in a different way to the banks. Generally, a bank will have a strict set of criteria a borrower needs to meet and long processing times. A private lender is generally a lot more flexible and will look at the overall risk/return ratio of the transaction to see if it makes commercial sense.
Because a private lender can be more flexible than a bank they are able to fund short-term loans, development projects without pre-sales or an urgent loan (unlike a bank which sometimes can take 6-8 weeks to provide finance).
Why invest in private mortgages?
Private mortgage investors have a great opportunity to participate in mortgage transactions that can generate strong returns. Private mortgages are secured by real estate which means that should the borrower not be able to repay what they borrowed then it is possible to take possession of the security property and recuperate the loan amount. Some private lenders require borrowers to pay the interest component of the loan upfront so that they can still achieve a return should they need to sell the security property.
With the banks placing more and more restrictions on who they will lend to, the opportunity for private lenders is growing and growing. Borrowers pay a premium to access funding from a private lender (interest rates are higher than a bank) which means investors have the opportunity to create passive income streams. In short, private lending is subject to a similar degree of risk as its banking counterparts but with much higher yields than term deposits.