Are you considering getting a private mortgage in Canada? Well, you came to the right place.
Nicknamed lenders of “last resort,” private lenders seem to have gained a negative reputation over the years. While there’s no denying the interest rates on private loans are higher than traditional A lenders, private loans can actually be a great way to get through a difficult financial time with a roof still over your head. Mortgage brokers will likely be your best resource when it comes to finding a private mortgage in Canada.
Did you know that borrowers with great credit also borrow private money? One common reason is home renovations, or they don’t want to break a first mortgage that has an extensive penalty. At CMI, we also see Canadians leveraging private money for tax consolidation, the paying of mortgage arrears, working capital for the self-employed, amongst other reasons.
Let’s take a closer look at what a private mortgage is and why you might consider taking out one.
What is a private mortgage?
Private mortgages typically offer shorter-term financing on a real estate asset. The typical private mortgage term is between 1 and 3 years. Private mortgages are all about freeing up a homeowner’s cash flow.
As such, many private mortgages only require you to pay the interest portion of the mortgage. You’re not required to pay the principal portion.
Although this helps you with cash flow, it’s important to recognize that if you make interest only payments, you won’t be any further ahead when your mortgage term ends. That’s why it’s important to treat a private mortgage as temporary and come up with an exit strategy.
Why would I consider getting a private mortgage?
With tighter lending guidelines in response to the rising level of household debt and heating real estate markets, private lenders help fill the gap if you don’t qualify under the strict guidelines of A lenders. Private lenders tend to look at a property’s value and marketability over the borrower’s credit history, which can help you if you have bruised credit due to a life event (i.e. job loss, death in the family, illness, etc.).
Here are some specific reasons why Canadians might consider taking out a private mortgage.
Unconventional property: You’d like to buy an unconventional property that A lenders won’t lend on. For example, it could be a motor home, vacant land, a fixer-upper, or hobby farm.
Quick approval: You’re looking for a quick mortgage approval that A lenders can’t meet the tight turnaround time.
Bruised credit: If you have bruised credit through a life event through that’s no fault of your own (you didn’t just choose to stop paying a creditor) and you can provide an explanation, private lenders may consider your mortgage application.
Short-term financing: If you’re only looking to borrow money short-term, private lending may be a good option.
Non-conforming mortgage: If you lack the income to qualify at an A lender (i.e. you’re retired, self-employed or you’d like to use stated income), you may be able to get mortgage financing with a private lender.
What factors do private lenders consider when approving a private mortgage?
When applying for a private mortgage in Canada, lenders will likely want to know why you require the funds. Lenders are pretty reasonable and may be willing to accept any reason that makes sense. Common reasons for a private mortgage include to consolidate high-interest debt, to cover home renovations and repairs, and to halt a foreclosure or power of attorney.
To help lower their risk, private lenders set maximum loan to value limits. Private mortgages typically don’t exceed 75% loan to value.
A private lender may also request to be in first position. This helps protects them should your property go into a foreclosure or power of sale situation.
To help lower their risk, private lenders typically set maximum loan to value limits. Private mortgages typically don’t exceed 75% loan to value. Generally, in urban markets, private mortgages are available up to 85%. Whereas with traditional lenders you can obtain up 80% loan to value on an unsecured mortgage, and 95% on a CMHC secured mortgage.
What mortgage rates and fees can I expect with a private mortgage?
Private lenders are nicknamed lenders of “last resort” because their mortgage rates and fees are typically higher than A lenders. That being said, as long as your private mortgage is temporary in nature and you have an exit strategy, then they can make sense in your overall financial picture.
In terms of interest rates, although it depends on where interest rates currently are, private mortgages tend to have interest rates in the 6% to 18% range. These rates are higher than mortgages offered by A lenders, which are currently in the 3% to 5% range. At CMI, we offer private mortgages with rates from 5.99% on first mortgages, and 7.99% on seconds, depending on credit score, loan to value, appraisal, and other factors.
In terms of fees, private mortgages almost always come with fees. Mortgage brokers also take a fee to compensate them for their time working on your application, since lenders don’t tend to offer a finder’s fee on private mortgages.
Fees tend to fall in the 1% to 3% range when working with a mortgage broker. This fee is payable to the broker and lender. It’s a good idea to ask about fees before applying for a private mortgage, as fees can vary depending on the lender and broker you decide to work with.
The benefit of interest only mortgages is that they tend to be fully open. That means that you can pay them off in full or break them at any time should it make financial sense.
Why should I have an exit strategy?
When working with a private mortgage in Canada, it’s important that you devise an exit strategy. As private mortgages can be costly, you’ll want to come up with a game plan to move from private lending to A lending. A mortgage broker can help you with this strategy, including devising your short term plan that includes a private mortgage, and help you decide the best financial route for you going forward longer term.
You’ll want to work with the broker to rectify any issues that kept you from qualifying at an A lender. For example, if it was credit, you can work with the broker on taking steps to improve your credit score. If it’s CRA (Canada Revenue Agency) arrears, you’ll want to get your taxes fully paid.
In summary, private mortgages can be a great solution if you come up with an exit strategy and game place to move back to A lending as soon as it’s financially feasible.
