If you’ve gone through the process of qualifying for and acquiring a mortgage, you may have heard of private mortgages. When it comes to finding a mortgage, there are just as many mortgage products out there to consider as there are lenders to provide you with one.
While most home buyers would consider a traditional mortgage as a favoured option, there are often instances where that option might not be accessible or the best choice for you. In those cases, you may want to approach private mortgage lenders to get your mortgage.
What is a Private Mortgage?
A private mortgage is a loan given out by any institution or person that is not a bank. Private mortgages usually involve much shorter terms, ranging from anywhere between 6 months to 3 years. The majority of them are also interest-only, and they do not require the principal to be paid down and instead require monthly interest payments.
Private mortgage lenders tend to offer more freedom and leniency then traditional banks. While banks are more exclusive to who they lend mortgage loans to, private lenders are more open minded and generally approve mortgages based on the value of the property rather than the credit history of the borrower.
Why Consider Private Mortgage Lenders?
There are several situations that might influence your decision to approach a private mortgage lender to get financing for a home purchase. These situations include:
- Poor credit
- Self employed with no steady source of income
- Being a new immigrant with limited or no credit history
- Need for emergency funding in a short period of time
- The need for a 2nd or 3rd mortgage for investment purposes
How to Apply for a Private Mortgage in Canada
While traditional mortgages require you to complete a formal application which involves a credit check, confirmation of employment, stress test, and subsequent approval (or rejection) from the lender, private mortgages are more like taking a quiz. Simply fill out a form with some of your financial information, submit it to a broker, and receive quotes on the type of rates and sums you qualify for.
To find a private mortgage broker, simply do a quick search online or consult friends and family. Terms such as “private mortgage” and “home equity loans” are sufficient to helping you find local brokers more than capable of helping you with your needs.
Qualifying for a mortgage from a private lender is often much easier than qualifying for a mortgage from a traditional source. Banks and credit unions much stricter requirements for income, credit history, and employments than a private lender. Even if you prove that you will be able to pay off the mortgage, they may still reject you because you fail to meet one or more of their other qualifications.
So how come private lenders are able to do for you what banks can’t? Private lenders view mortgages as an investment opportunity. They are less concerned with your credit history and more concerned with the value of your property, your down payment, and how your loan will be paid back. While it is never their goal to foreclose your home, private lenders have the toolset to do so, whereas banks simply opt to not touch foreclosures if possible and view it as a high-risk trait.
Differences Between Traditional and Private Mortgages
There are several differences between traditional and private mortgages.
1. Interest rate
With all the versatility a private mortgage can offer comes a higher price. On average, the interest rates for private mortgages in Canada range from 8-18%; this varies based on the lender and your circumstances. These are noticeably higher than interest rates for traditional mortgages, which tend to hover around 2-5%, depending on the type of mortgage product and the lender.
2. Down payment
Private lenders will typically require a minimum down payment of 15%. This is to achieve an 85% loan-to-value ratio – or higher depending on your individual situation as well as the type of property you’re financing. Since private lenders emphasize the value of the subject property over the credit and employment history of the borrower, it’s more important for them to be shielded from if things are to go awry.
3. Length of the term
A third difference is the length of the term. Traditional mortgages usually have terms lasting up to 10 years, while private mortgage terms can range from six months to three years, depending upon the lender and your personal needs at the time.
4. Type of property
If you are purchasing a standard house, condo, or any single unit property, a traditional mortgage is your best bet. But if you own a non-traditional residential property, such as a micro condo or a trailer, approaching a private lender may be your only option.
5. Type of client
Since private mortgages are much shorter termed, they are favoured by home investors who are looking to fix-and-flip a home. Once a sale is made on the home, the private mortgage can then be paid off in full. On the other hand, if you are purchasing a property to live in, it is unlikely for you to amass the capital needed to repay the loan in just a few years’ time.
Private lending may also be your only choice if you are unable to obtain financing from a traditional lender due to bad credit or if your financial situation changed drastically due to divorce, loss of income or other unforeseen situations.
6. Payment structure
With a traditional mortgage, if your payment cycle ends and you still have not paid off the principal, then you have the option of renewing it or bringing it to a different lender. This will continue until the principal is paid off in full
In a private lending scenario, since the payment plan tends to be much shorter, the exit strategy is more concrete in its structure. For investors, a 3-6 year time is often sufficient for a property to be renovated and resold. In bad credit scenarios, such as debt consolidation private mortgage loans, terms can be extended depending on the unique needs of each client. Unlike traditional mortgages, where your monthly payments go directly towards paying off the principal, private mortgages are interest-only loans and only require monthly interest payments as a result.
The only instances where you may have to deal with fees are legal fees if you have a collateral mortgage or administrative fees when your term expires and you choose to transfer your mortgage to a new lender instead of renewing with your current one.
Private mortgages usually have a few fees involved. These include legal fees, loan processing fees, appraisal fees, and broker fees if arranged with the assistance of a mortgage broker. Speak with your intended private mortgage provider to get a thorough understanding of all the fees involved.
Should You Consider a Private Mortgage?
If you’ve already tried to apply for a traditional mortgage and was declined or want to take out a loan for purposes other than purchasing a home, acquiring a private mortgage would be your best bet. At Leap Financial, we help people like you secure the best rate private mortgages possible. Speak to one of our specialists today to find out more.