Privately funded mortgage: 2018 is probably the most relevant year to discuss this topic, or at least it’s more relevant now than in the many years prior. A privately funded mortgage is the option that must be explored when both the ‘A’ and ‘B’ lending routes fail. The reason we say that it’s more relevant in 2018 is because of that darn stress test… it’s really messing things up for home owners and home buyers and as such, there is a greater demand for privately funded mortgages. The stress test is essentially a new underwriting requirement (applicable to all purchase and refinances regardless of credit, income or down payment) that ensures the borrowers ability to carry their mortgage even in the hypothetical circumstance of a serious market crash (when interest rates subsequently sky rocket). Trust us, we’re not happy about it either, but we’re required to use it… and use it we must! What does this have to do with a privately funded mortgage you might ask? Well to begin with, your affordability is based on 2 important debt servicing ratios referred to as GSD and TDS. These 2 ratios are not allowed to exceed a certain percentage (hard and set rule), and that percentage varies depending on whether you were seeking out a mortgage from an ‘A’ or ‘B’ bank. Prior to the stress test regulations, you might have qualified for an amount that was quite fair and within the budget of your homes of interest. With the new stress test, you could easily no longer afford (on paper) the same home you were able to afford prior to the new rules. This is very problematic for many people, especially for those that have already committed to a builder/seller to buy a home at an agreed price. This is where the privately funded mortgage comes into play.
A privately funded mortgage is a third and last resort option as fees/rates will certainly be higher. If possible, our efforts with the banks will be always be exhausted before perusing a privately funded mortgage, but if all else fails and your numbers do not work within their guidelines, a privately funded mortgage will end up being the solution that saves you. Though more expensive, arranging a short term privately funded mortgage will be less consequential than pulling out a firm sale agreement (as you may face much harsher legal consequences… that’s just where it begins). A privately funded mortgage can be arranged for as little as 6-12 months, so when we say short term, we mean short term! Favorably, private lenders are not required to use the stress test, and very rarely will they follow the same income qualifications as traditional lenders. A privately funded mortgage is not something that is meant to be kept for a long period of time (and we strong advise against it). Each mortgage size is different and therefore the associated costs can vary and are very much calculated on a case by case basis. I understand that this may not be a definitive answer, but that’s why it’s very important to meet with us to go over the steps, requirements and cost breakdown in person. Here are the simplified steps to follow if you think you need to seek out a privately funded mortgage:
Step 1: Set an appointment with us (time is crucial so please don’t wait until the last minute)
Step 2: We will explore all routes starting from most favourable (A then B, and lastly private) to ensure that IF there is a better option, we will proceed with it.
Step 3: Go over the terms/conditions/costs – Essentially an important Q&A session
Step 4: Discuss the exit strategy. A broker isn’t doing their job unless they discuss with you the long term goals as well… and the goal is to transition OUT of the privately funded mortgage when the time permits.
It’s important to understand that a privately funded mortgage may not be the first option, but it is an option and having that option is a heck of a lot better than defaulting on a contract, losing your deposit and most importantly losing your dream home!