When investing, achieving the best return on your money requires careful assessment of the risks and the rewards. It is vital that you know your investment is secure.
One thing that is critically important when considering a private mortgage investment is how much risk is involved and what security you have as an investor. The best ways to determine the risk of a loan is by looking at the Loan-to-Value Ratio (LVR) and the type of security property.
The LVR is the amount being borrowed represented as a percentage of the value of the property being used as security for the loan. Placing a strong emphasis on the LVR is crucial when assessing an investment. The lower the LVR, the lower the risk to you as an investor.
Different security property types.
There are different types of real estate which can be used as the security for a loan. The property is used as protection for the lender in the event the borrower cannot repay the debt. The lender can take possession of the asset and sell it to recover the loan principal, accrued interest and any costs associated with enforcement.
Real estate is carved up into different sectors Loans can be secured by different types of security property including: residential, commercial, industrial, rural, land, and development. The majority of loans that Active Property Group invests in are secured by residential property.
Managing the risk.
Securing a loan with different property types changes the risk profile of that loan. For riskier security property types (e.g. a rural property), a lender will lend at a lower loan-to-value ratio than if the security property was a less risky security (e.g. a residential property).
For example, let’s look at a standard four-bedroom home in suburbia as a security property and compare that to a four-hectare parcel of land in the middle of nowhere. If the borrower went into default and the lender had to take possession and sell the security property, it is going to be a lot quicker for the property in suburbia to sell versus the property in the middle of nowhere. The lender needs to ensure that they are going to be able to recuperate the funds and return them with interest to our investors. Hence, the riskier a security property is, the lower the LVR to be applied.
Experienced Mortgage Manager.
The takeaway here is that when it comes to private lending, make sure you are working with an experienced mortgage manager who knows how to navigate the intricacies and mitigate the risks associated with lending. The mortgage manager has a lot to consider when deciding how much we should lend to a borrower and a critical part of the decision is the security property.
Active Property Group’s mortgage manager, Private Mortgages Australia, ensures that we are making sound lending decisions so that we can continue to deliver strong returns to our investors.
If this sounds of interest to you, head on over to https://activepropertygroup.com.au/private-mortgages/ and register your details and we’ll send you more information.
NB: This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.
And while we’re on this topic, here’s a video from our resident mortgage investment expert Tony Barbone discussing the different types of security used when investing in private mortgages.