Private Lending

For those having  trouble qualifying for a traditional mortgage, other solutions are still  available, one of which is a private mortgage, interest only mortgages.

And with increasingly stricter mortgage regulations and qualification  requirements being introduced by the government, they’re growing in  popularity.

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 if the new guidlines are implemented as proposed.

What makes interest only loans appealing is that 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.

This is why 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

Non-residents

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

In terms of the key benefits of a private mortgage, the  need for less documentation as part of the approval process 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 sufficient down payment  or equity in your property, private mortgages are relatively quick and  simple to obtain.

While traditional bank mortgages are qualified primarily on the  borrower’s financial standing and his or her ability to service the  debt, private lenders place more weight on the quality of the property  itself, in addition to the down payment and the client’s ability to  repay to loan.

Because properties in more marketable urban areas carry less risk for  the lender in the event of foreclosure, they can offer slightly more  favourable rates and go up to a higher loan-to-value compared to  properties in rural areas or undesirable neighbourhoods.

The Higher Cost of Private Mortgages

In addition to the interest-only payments, private  mortgages typically come with higher interest rates to compensate the  lender for the increased risk they are taking on.

Interest rates can range anywhere from 10-18%, making them much more  costly compared to a traditional prime mortgage starting as low as 2.50%  for a 5-year fixed term. For this reason private mortgages are usually  considered a last resort.

Additional fees can be involved with private financing, including lender, legal and broker fees.

Whereas broker fees are almost always paid as a commission directly  by the lender in the case of traditional mortgages, the borrower must  cover this cost when turning to a private mortgage.

Adding in lender fees and legal costs, total fees can amount to  anywhere from 1-4% of the loan amount, though this can be rolled into  the mortgage.

It is important to understand the risks before getting a private  loan.  The first questions to ask yourself are, ‘Will my  financial situation change in the near future so that I can switch to a  conventional lender soon?’ and ‘Will I need this mortgage only for a  short period of time?’ If your answer is ‘no’ to both of these  questions, private mortgage might not be a suitable solution.”

For anyone considering a private loan, a mortgage broker can help  weigh the benefits against the costs to determine if one is right for  you.  Our mortgage company has access to several lenders.