2023 is going to be a huge year for both ‘private mortgage lender’ demand as well as homeowners looking for options to exit from a private mortgage (as many owners entered into private mortgage agreements throughout 2022).
When needed, private mortgage lenders can offer several advantages over traditional lenders such as banks and credit unions. Firstly, they are much more flexible when it comes to lending criteria, allowing borrowers with less-than-perfect credit scores or income documentation to still qualify for a loan. It’s also true that private mortgage lenders can often provide quicker loan processing times and more personalized service (sometimes as quick as 48 hours)
But, there are also potential drawbacks to private mortgage lenders which are worth noting. Firstly, the interest rates and/or fees charged by private lenders are higher than those offered by traditional banks and lenders, so it’s a more expensive solution. This often results in higher monthly mortgage payments and requires ‘interest only’ payments to keep payments manageable. Additionally, private mortgage lenders require a bigger down payment and offer shorter loan terms than traditional banks (for example, 20% down minimum, 1-year term maximum). This can be challenging for borrowers to meet (especially first-time buyers). Finally, private mortgage lenders are not subject to the same stringent regulations and auditing as institutional lenders, so borrowers need to be cautious before entering into a mortgage agreement (it’s always in a borrower’s best interest to work with a reputable mortgage broker who will do this due diligence for them and who likely has established relationships already).
Paying off a private mortgage lender can be easy, but also comes with its own challenges.
The most feasible way to pay off a private mortgage lender is to refinance the mortgage with a traditional lender at maturity. Refinancing means taking out a new mortgage to pay off the existing mortgage, and it’s the best way to secure a lower interest rate, longer repayment term, or more favorable mortgage terms. However, to qualify for a mortgage refinance, borrowers will need to meet the lending criteria of the new bank/lender, which includes minimum credit score requirements, sufficient (provable) income, and equity in the property.
A second, and less favourable option, is to sell the property and pay off the mortgage. If the property has increased in value since the mortgage was taken out, selling it can be a good way to pay off the private mortgage lender while potentially making a profit in the process. However, if the property has decreased in value or is in a slow real estate market (which could be the case in 2023), selling it may not be feasible without absorbing a loss.
Lastly, borrowers can negotiate with the private mortgage lender to modify or extend the loan terms allowing them additional time to pay out the mortgage. Modifications or extensions could include extending the repayment term or reducing the interest rate. However, borrowers should be aware that private mortgage lenders may be less willing to negotiate than traditional lenders, and any amendments to the original terms and conditions might come with a price.
Before you commit to a private mortgage lender, or if you’re already in a private mortgage, we should discuss in much greater detail to determine whether there are better options for you. Call us today at (905) 455-5005.