Private mortgages are used when traditional sources fail. With the recent mortgage rule changes, many home owners and potential private mortgages borrowers no longer qualify for traditional bank or “A” mortgage lending. If a borrower cannot get financing through a bank or a traditional “A” lender, then there are many other options to consider. Alternative or B lending could be beneficial for those with bruised credit, self-employed borrowers or a buyer/home owner looking for financing on a unique property. Alternative lenders are still very reputable and large financial institutions but may charge a slightly higher interest rate and/or a lending fee. Private Mortgage lending is recommended for short-term financing situations whether it be a few weeks or a year when all other options are off the table. The interest rate and lender fees are typically much higher in in case of Private Mortgages case.
Speaking to a mortgage professional about alternative or private Mortgages/lending is extremely important as these products and lenders may not be suitable for everyone. If alternative and private lending is an option for mortgage financing, it is important to have a short and long-term plan in place so that one day you can hopefully switch your mortgage back to a traditional “A” lender
Who might consider a private mortgage?
Anyone can be a private lender. That’s right, anyone who’s willing to lend the money and put their name on the deed is considered a private lender. Private lenders don’t particularly care about your credit rating. They prefer to focus on whether you can pay back the loan, often at a higher-than-market rate and the value of the home. While Nguyen says a private mortgage is a last resort, it can be useful in specific circumstances:
- Self-employed who have an irregular or unsteady income.
- Those who don’t have the best or any credit. This includes non-Canadian residents who don’t have credit history within Canada.
- Emergency funding. Dash says a private mortgage could be a bridging option if you’ve bought a house before selling your previous home.
- Those who have a bankruptcy on their record.
- Small homes that can’t be refinanced. This could include investment properties or tiny homes.
How to treat a private mortgage
“It’s a short-term, not long-term solution,” says Nguyen. “Read the fine print on the contract. Some brokers may take advantage of their clients and charge high fees.” Dash caps broker fees at 5%, but Nguyen says she’s heard of fees much higher, adding up to thousands of dollars. So if you are going to get a private mortgage (Nguyen says try to borrow from your parents first or consider waiting to buy for a year if you can), here’s what to do:
- Get a lawyer who understands and can explain private mortgages.
- Read all the fine print.
- Make sure you understand all the terms and conditions.
- Work with a broker you trust.
- Work with your financial advisor to make sure you can afford a private mortgage.
- Have a financial plan to pay off the private mortgage.