- Mortgage Loan

Investing in Mortgage Loans

Loan and Credit offers the purchase of mortgage returns with high returns and limited risk. Investing in mortgage loans typically yields a return of around 5-9%. The risk associated with mortgages is limited as the investor gets collateral in the home, which means the homeowner may be forced to sell the home in case they do not service their loan.

Investing in mortgages is at risk somewhere between equity and bond investments, as the risk associated with investing in mortgage deeds is substantially lower than equity investments, but higher than many bonds. A more comparable form of investment could be real estate investment.

Mortgage Investing vs. traditional real estate investment

Mortgage Investing vs. traditional real estate investment

The reason for investing in mortgage deeds in many areas is reminiscent of traditional real estate investments is that the rate of return (before leverage) is typically in the range of 5-10% and that the risk is limited as you own or own a mortgage.

The Most Important Benefit of Mortgage Investing vs. Traditional real estate investment is that the administration is significantly cheaper and requires minimal effort on an ongoing basis. Conversely, as a landlord, you have the maintenance obligation on the property as well as work on continuously finding new tenants.

Conversely, real estate investment is favored by the fact that these can often be borrowed with super cheap mortgage financing of up to 80% of the property value, which allows the investor to significantly raise his return without taking on a significantly increased risk. However, it is also possible to transfer your mortgage deed investments to the bank if you wish to build a serious mortgage deed portfolio of at least USD 5-10 million.

What is a Mortgage Loan?

What is a Mortgage Loan?

Mortgage loans are a form of mortgage-backed mortgage that are offered to Danes as alternative mortgage financing. The mortgage interest rate on mortgages is typically in the interest rate level of 5-9%. Since the mortgage interest rate is substantially higher than the mortgage loan, the typical applicant for a mortgage loan loan has previously been rejected for mortgage lending.

Although mortgage loan applicants are typically rejected by the bank, this does not mean that they are poor payers or people with a mess in the economy. This means that it is people who for one reason or another do not fit into the banks’ boxes and are therefore rejected. The most typical grounds for rejection by the banks are the following:

  1. The debtor is self-employed
  2. Debtor wants to borrow for a cheap housing in “Udkantsdanmark”
  3. The debtor is new to the job and cannot present paychecks for 3-6 months
  4. The debtor has previously had, or is paying off, tax debt.
  5. The debtor has “only” saved 5% for the payment on home purchases

Mortgage loans therefore allow ordinary Danes to live out their dreams, even though the banks say no to pay interest rates that reflect the lender’s risk.

The term of a mortgage loan typically runs over 5 to 25 years.

Expected return on mortgage deed investment

Expected return on mortgage deed investment

As mentioned earlier, the interest rate on mortgage loan loans typically ranges from 5-9%. However, a distinction must be made between variable and fixed-rate loans.

  • Interest rate for fixed-rate loans: 7-9%
  • Interest rate for floating rate loans: 5-7%

Fixed rate loans make up between 80-90% of the total loan from Loan and Credit, as investors and debtors most often prefer fixed interest rates.

Variable-rate loans are typically based on the reference rate CIBOR-12M + 5-7 percentage points, which gives a loan rate of around 5-7%.

What is the risk of mortgage deed investment?

What is the risk of mortgage deed investment?

There is also a tradition in the industry to budget with a long-term loss ratio of approx. 0.5-1%. However, the number fluctuates significantly depending on whether there is a recession or a boom in society. In the boom with rising housing prices and high real estate marketability, the loss ratio is typically below 0.5%, but in a crisis with a recession it may well exceed 1%.

The above figures must be taken into consideration, as the loss ratio obviously also depends on the individual investor’s investment strategy and risk profile.

How do I determine an investment strategy?

How do I determine an investment strategy?

Before you start investing in mortgage deeds, you should consider its risk profile and investment strategy. Here, just as in the stock market, if you want a high return on your investment, you must take a greater risk, and similarly you can reduce your risk by demanding a lower return.

Focus on debtor, mortgage security or both

To determine its investment strategy, one should consider whether in its credit rating one wants to focus on the debtor, mortgage or both. For newbies, it is usually easiest to focus on what is commonly called “mortgages”, where the investor primarily deals in collateral and thereby has less focus on the debtor’s finances.

Determine loan type: Loan in value or loan for home purchase

When investing in mortgages, you as an investor should also consider whether you want to offer loans to existing homeowners who would like to borrow in their home value or whether you want to offer loans for home purchases. See below for the pros and cons of both loan types:

Loans at fair value

Advantage:

  • Less loan amount. Average USD 250,000.
  • Nice debtors.
  • Good locations eg. Copenhagen, Aarhus and North Zealand.
  • Typical short term loans (5-15 years).

Disadvantages:

  • Typically 2nd or 3rd mortgage loans.
  • Poorer placement of the mortgage.
  • It requires additional capital if you want to defend your mortgage on any. forced auction, as the above priorities must then be redeemed or taken over.