When to consider getting a private mortgage?

For some it may not always be easy to obtain a mortgage directly from a bank for reasons noted below:

  1. Self-employed borrowers
  2. Non-residents
  3. Qualification requirements
  4. Stricter mortgage regulations

 

In 2015, about 4.5% of Canadians went to private lenders (PL) with numbers that keep on growing at a much quicker pace, especially if the new underwriting guidelines are proposed and put in place.

What makes a private mortgage attractive is, that you do not have to pay down the principal like you would with a regular mortgage. Therefore, this would reduce your monthly mortgage payment. Keep in mind, it is not recommended as a long term solution; in fact, quite the opposite.

Borrowers tend to rely on a PL why? Because their intention should be to borrow funds anywhere from one to three years. So why would anyone want to increase their debt later down the road? To improve their credit or even emergency situations.

There are two benefits with a private lender when it comes to your credit history.

If you have enough funds to cover the down payment or equity in your home. A PL can get you a mortgage pretty quickly.

While financial institutions tend to approve a loan based on your financial stability and whether you are able to pay down the loan. PL leans more towards the quality and value of the property, plus your payment.

So will it cost me a lot more? It sure will.

As mentioned earlier, you may not be paying the principal amount, however, a PL will definitely come back with a higher interest rate as it needs to compensate your lender because they are taking a higher risk.  Be prepared to incur fees such as private financing, including lender, legal & broker fees.

Usually a broker’s fees are always paid on commission by the lender, so you as the borrower will have to cover this cost because you’re using a private lender.

What rates and fees you can expect

A sample of what interest rates you can expect are typically anywhere from 10-18% vs. a low of 2.5% 5-year fixed-rate mortgage. It’s noticeably quite different. This would be why it’s not suggested. A private mortgage can be used as a long resort. Lending & legal costs can range from 1-4% of the loan amount and can be rolled into your mortgage.

In conclusion, ensure you are fully aware of all risks being taken before considering a private mortgage. You may want to ask yourself, “Am I only taking this loan for a short period of time, with the intention of switching to a conventional mortgage? Will my current financial situation change down the road?”

If your answer to both questions was no, it may not be in your best interest to proceed.

For further guidance and assistance on best mortgage rates, or best mortgage products available to you, please call Noble Mortgages Inc. @ 416-241-2227 or send us an email at info@noblemortages.ca