Syndicate mortgages… the danger that lies within

BY FAZAAD BACCHUS

Some years ago if you wanted to invest in financial instruments, it would mainly be in GIC’s, Bonds and then later on in Mutual Funds. While many investors were still concentrated in buying properties, it wasn’t for everyone. Properties required larger deposits, qualifying for mortgages and finding tenants to pay the rent so that the loan could be serviced. Tenants proved to be headache for many landlords and for many, investment properties was a stay away for many.

A few years ago syndicate mortgages were developed and while the public was unsure of how it worked, the marketing was top of the line and many promises were made, promises which we now know are not necessarily true. The most attractive feature of a syndicate mortgage was its simplicity, deposit some money to an institution, receive a guaranteed monthly interest and when the period is over, and recover your deposit. Frankly speaking it’s quite a no brainer especially as the guaranteed interest rate is significantly more than your local bank.

One of the first things to understand when it comes to investments, is that the greater the return- the greater the risk. The guaranteed return is not guaranteed and is only assured by the very investment providing a return. Therefore if the project has financial difficulty, the monthly income which is derived from the interest earned is not payable. If you are a retiree depending on this income, you could be in for a rude awakening.

Is your deposit secured? Well according to the broker, yes it secured and that is absolutely correct, but it is not guaranteed. So what is the difference between secured and guaranteed? The deposit is secured again by the investment where you are told that if the project fails, you will be second in line at best (the bank being the first) to collect your money and that is if there is any money left to be paid out.

And if that fails, at least you a have a deed unto the property where you are on title and therefore guaranteed to recover, this could be nothing further from the truth. Yes, you do have a deed but do you know the financials? What is owed and whether the property left has any value to pay out after it has paid out its primary debtors? Syndicate mortgages are not backed by the government or any other investor protection fund, and neither is there default insurance available to you in case the project bellies up.

What about liquidity? If you need a certain sum of money in a hurry, would it be available to you? Most cases that I see take approximately 30 days before a release of funds as they have to resell the mortgage. When the project is in trouble, and cash flow is a problem, there are no payouts.

All syndicate mortgages are not bad; or else the government would have stopped the sale of them. However should you decide to get into one, first understand the risk involved and talk to a financial advisor before you make the wrong choice.