Here is everything you need to know about Private Mortgages in Canada before deciding if a private mortgage is right for you.
First and foremost – What is a private mortgage?
A private mortgage is an alternative mortgage solution offered by private mortgage lenders. Private mortgages are not regulated under the Bank Act (or Credit Union Act/Trust Companies Act) and so, these lenders are not mandated to follow the same stringent guidelines required by most banks, Trust Companies, and Credit Unions – thus making them attractive under certain circumstances.
Who can lend private mortgage loans in Canada?
In Canada, individuals (or groups), corporations, and Mortgage Investment Corporations (MICs) can lend private mortgages to borrowers. Often referred to as ‘private lenders’ or ‘equity lenders’, these lenders are easily accessible through mortgage brokerages throughout Ontario and Canada.
Do private mortgage lenders need to be licensed in Ontario?
Until further notice, private lenders do not need to be licensed in Ontario (or Canada for that matter). However, a private lender cannot lend their money directly to any consumer (borrower) without the use of a licensed Mortgage Brokerage. Mortgage Brokerages carry the mandatory licensing and insurance (as per the law) to broker these transactions.
Why should I consider a private mortgage?
It’s important to note that priority should always be given to institutional mortgages (schedule A or B bank) since these banks offer the most competitive rates and terms. Private lending is never (or should never be) a default mortgage option. However, as rules continue to tighten and banks become more stringent with qualification guidelines, a private loan can be considered under any circumstance where a bank refuses to help. Also, private mortgages can become very suitable solutions when money is needed for a shorter timeframe (credit rebuild, debt consolidation, renovations/flip, short term investment, etc.).
Are private mortgages more expensive?
Yes – Private mortgages are more expensive than traditional mortgages both in interest rates and closing costs. Rates will fluctuate based on the loan-to-value, position of the private mortgage (1st vs. 2nd), and the lender. Closing costs will also fluctuate based on the lender but are mostly influenced by the loan size as some costs are calculated on a percentage basis of the amount being borrowed (in other words, the higher the loan amount, the higher the closing costs).
How do I pay off a private mortgage loan?
Under most circumstances, private loans are short-term solutions. The typical term for a private mortgage is between 6- 12 months (longer terms do exist but are less common). One of the biggest misconceptions about paying off a private mortgage is that it can be paid off within the term of the loan. Since most private mortgages are interest-only (not amortized), you will still owe the entire principal at the end of the term. This means that a private mortgage is best paid out through a lump sum payment at the end of the term (either by refinancing to a bank or by replacing it with another private mortgage if circumstances don’t allow for a refinance).
How long does it take to get a private mortgage?
One of the biggest and most known advantages of private lending is how quickly a private mortgage can be arranged compared to traditional financing. Unlike a bank mortgage, which often has a turnaround time of 3-4 weeks, a private mortgage lender can arrange financing within as little as 4-5 business days (sometimes quicker). When you’re in a time crunch, this is truly where private mortgages can beat the bank.
What do I need to qualify for a private mortgage?
Qualifying for a private mortgage is far easier than traditional banking because private lending does not follow the same qualification guidelines as traditional mortgages. Banks have strict guidelines to follow (aka. debt servicing ratios, income qualification, etc.). Private mortgage lenders are more concerned about the equity portion of their investment to ensure that it’s not overexposed to external market conditions. To qualify for a private mortgage, the private lender is likely to require the following (not an exhaustive list – each private mortgage lender will differ):
- Existing Mortgage statement
- Property tax bill
- Home insurance statement
- Appraisal
- Independent legal representation
Do you need to know more about private mortgages, private lending, and private mortgage lenders? Perhaps you would like a second opinion on a private mortgage you’re considering? There is no one size fits all solution with private lending – this should be a key takeaway. Understanding how the solution presented meets your goals (long and short-term) is important in assessing the suitability of a private mortgage.
We have decades of experience, appropriate licensing, and ethical agents/brokers ready to help you.
Call us today at (905) 455-5005.