With increasingly stricter mortgage regulations and qualification requirements being introduced by the government, Private Mortgages are growing in popularity. For those having trouble qualifying for a traditional mortgage a Private Mortgage can be an alternative solution. Private lending accounted for approximately 4-5% of Canada’s overall mortgage market in 2015, according to data from Teranet. Anecdotally today’s number is higher and growing fast, and is set to grow even faster due to the B-20 guidelines implemented.
Interest only loans are appealing because you are not required to pay down the principal of your mortgage, therefore reducing your monthly payment. Interest-only payments improve the monthly cash flow, but for obvious reasons they are not a viable long term solution. Private mortgages are meant to be short-term solutions, typically one to three years, to help borrowers achieve their goals while they improve their credit, or for emergency lending situations.
Private mortgages have their place in the market, and are commonly used in some of the following cases:
- Borrowers with inadequate credit to qualify for a traditional bank mortgage
- Self-employed borrowers with unverifiable or unsteady income
- Emergency funding for those going through foreclosure, or those with property/income taxes in arrears
- For mobile homes or micro-condos (less than 600 square feet) that often can’t be financed/refinanced through a bank
- For second mortgages/investment properties
One of the key benefits of a private mortgage is less documentation, as part of the approval process. This can be useful for self-employed applicants who can have difficulty proving their income. Private lenders are also much more flexible when it comes to your credit history. As long as you have a sufficient down payment or equity in your property, private mortgages are relatively quick and simple to obtain. Traditional bank mortgages are qualified primarily on the borrower’s financial standing and his or her ability to service the debt. Private lenders tend to place more weight on the quality of the property itself, in addition to the down payment and the client’s ability to repay the loan.
Private mortgages typically come with higher interest rates to compensate the lender for the increased risk they are taking on. Properties in more marketable urban areas carry less risk for the lender in the event of foreclosure, so they can offer slightly more favourable rates and go up to a higher loan-to-value as opposed to properties in rural areas or undesirable neighbourhoods. Rates can range anywhere from 10-18%, making them much more costly compared to a traditional prime rate mortgage for a 5-year fixed term. Plus additional fees can be involved with private financing, including lender, legal and broker fees and can amount to anywhere from 1-4% of the loan amount, which can be rolled into the mortgage. For this reason private mortgages are usually considered a last resort.
Understanding the risks before getting a private mortgage is important. Ask yourself:
1. Will your financial situation change in the near future so that you can switch to a conventional lender soon?
2. Will you need this mortgage only for a short period of time?
If your answer is ‘no’ to both of these questions, a private mortgage might not be a suitable solution.
Are you considering a private mortgage? I can help weigh the benefits against the costs to determine if one is right for you. Contact me to find out more.