3 things investors must consider when choosing between first and second mortgages
One of the most common questions when investing in pooled mortgage funds is whether it’s better to invest in a first mortgage or a second mortgage. The answer, however, isn’t as straightforward as it seems because investing is a personal decision affected by individual preferences such as risk tolerance and financial goals.
In this article, we focus on the three things investors should know about first and second mortgages so you can determine which best suits your investment goals.
Earn Passive Income With Our Pooled Mortgage Fund
Quarterly distributions
Minimum investment from just $10K
No lock-in investment term
1) Difference between first and second mortgages
A first mortgage is simply the first right over the real estate owned by the borrower. That is, when a borrower takes out a loan, that loan is secured by property and should the borrower default, the lender can liquidate that property to recover the value of the amount loaned, any interest owed and other costs associated with the loan.
Should the borrower take out another loan from a different borrower using the same property as security, that is a second mortgage. In the event that the borrower defaults, the first lender gets priority when the security property is liquidated. The second lender can only receive the proceeds from the security property after the first lender gets their share, assuming there’s anything left to liquidate.
Hence, second mortgage investments are inherently riskier. But because of this added risk, borrowers are charged higher interest which means returns to the investors are also higher.
2) What’s my risk tolerance?
Given the nature of first and second mortgages, determining which investment is better will boil down to your personal tolerance for risk. Are you the type who is willing to take on more risk to get higher returns? Or are you more conservative in your approach where you’d rather more security but lower returns?
If you’re the former, investing in a second mortgage might look more enticing. For those with a lower tolerance for risk, the first option will look more sensible.
3) What are my investment goals?
Of course, the other side of risk is reward. While a first mortgage is less risky than a second mortgage, there is still risk involved. And with that risk, investors must determine for themselves if the reward is worth it to take on that risk. Again, this will vary from person to person. The bottom line is that selecting an investment option should always align with your financial goals.
The APG Way
At APG, we structure our pooled mortgage fund to include both first and second mortgages. On average, we have about 30 loans in our portfolio at any given time and around 70% of those loans will be first mortgages. We diversify our pooled mortgage fund for strategic reasons:
- Conservative risk management – by spreading our mortgage fund across multiple loans, our investors aren’t left vulnerable to the situation of a single borrower. Should one borrower default, there will still be other borrowers regularly paying back their loans, which means our investors are still able to earn profits from interest.
- Balanced risk-to-reward benefits – including second mortgages in the mix can improve investors’ ROI compared to just having exclusively first mortgages. And because the majority of the portfolio consists of first mortgages, we’re still able to maintain a conservative risk management strategy in the process.
Other Benefits of APG’s Pooled Mortgage Fund
Passive income – Unlike direct mortgage investments that require active participation from the investor, pooled mortgage funds are passive investments, suitable for investors who may not have the time to do extensive due diligence on their own. As the fund manager, the experienced team behind APG sources loan opportunities and then manages the loan process from beginning to end.- Regular distributions – Investors in APG’s pooled mortgage fund receive regular quarterly income based on the performance of our portfolio of loans. Unlike in direct mortgage investments, an investor will only receive their earnings at the end of the loan term. This is the reason why pooled mortgage funds are attractive investment options for those looking to earn extra income without having to closely manage their investments.
To learn more about APG’s pooled mortgage fund, you may book a call to speak to our Investor Relations team and they will gladly answer any question you may have.
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.
If you have any questions about investing in private mortgages then please send us an email to [email protected] or message us via our Contact Page.
If you have any questions about investing in private mortgages then please send us a message via our Contact Page.
