A Guide to Private Mortgages in Canada
by TheBroker.ca Ltd.
Understanding Private Mortgages
A private mortgage is a home loan financed through a private source of funds, such as individual investors or private lending companies, i.e., entities like mortgage investment corporations, that are in the business of lending money secured by real estate, instead of traditional lenders like banks or credit unions. Unlike traditional lenders, private lenders are not bound by the stringent rules and regulations that banks and credit unions must follow. This allows them more flexibility in terms of the types of mortgages they can offer and the criteria they use to assess potential borrowers.
Private mortgages are often short-term (1-3 years). Some are amortized similar to traditional mortgages, but for the most part they are interest-only loans, where borrowers pay only the interest on the mortgage during its term and repay the full amount borrowed at the end.
Goals of Private Lenders
The primary goal of private lenders is to generate a return on their investment. They accomplish this by charging interest on the mortgages they provide. The interest rates on private mortgages are typically higher than those of traditional mortgages, reflecting the increased risk associated with these mortgages.
However, it’s important to note that private lenders play a crucial role in the real estate market. By providing financing options to those who might not qualify for traditional loans, they contribute to the diversity and inclusivity of the market.
There’s a common misconception that private mortgages are a last resort for those with poor credit. While it’s true that private mortgages can be an option for those situations, they’re also a viable choice for investors looking for short-term mortgages, or homeowners seeking more flexibility than traditional lenders can offer.
Benefits of Private Mortgages
Private mortgages offer several benefits. They provide quick financing, flexible terms, and approval is typically based on the property’s value and investment potential rather than solely on the borrower’s credit history or even income. This makes private mortgages an attractive option for real estate investors or individuals who might not meet traditional lending criteria.
When to Consider a Private Mortgage
Private mortgages are suitable for a variety of situations. They can be an excellent choice for real estate investors seeking short-term financing, individuals looking to renovate and sell for profit, or homeowners with equity in their property who may not qualify for traditional financing due to irregular income or credit issues. Also, when buyers are dealing with shorter closing dates, or only need short term financing, and don’t want to pay the penalties to break a long term mortgage. You broker should explain to you clearly why this type of financing is recommended instead of the more traditional or alternative financing options.
Mortgage Broker Responsibilities
A mortgage broker acts as an intermediary between borrowers and lenders, facilitating the process of securing a mortgage. They have a dual responsibility towards both parties involved.
Responsibilities towards Borrowers
For borrowers, a mortgage broker’s responsibilities include:
- Understanding the Borrower’s Needs: The broker should take the time to understand the borrower’s financial situation, property goals, and mortgage needs.
- Presenting Suitable Options: Based on the borrower’s needs, the broker should present a range of suitable mortgage options from various lenders.
- Explaining the Terms: The broker should clearly explain the terms and conditions of each mortgage option, including interest rates, repayment schedules, and any potential risks.
- Assisting with the Application: The broker should assist the borrower in completing the mortgage application and gathering necessary documentation.
- Negotiating on Behalf of the Borrower: The broker should negotiate with lenders to secure the best possible mortgage terms for the borrower.
Responsibilities towards Lenders
Towards lenders, a mortgage broker’s responsibilities include:
- Presenting Qualified Borrowers: The broker should only present lenders with borrowers who meet their lending criteria.
- Providing Necessary Documentation: The broker should provide the lender with all necessary and original unaltered documentation, and information about the borrower, and is responsible for presenting facts in truthful manner, without providing false or deceptive information, and without withholding any information from the lender.
- Facilitating Communication: The broker should facilitate communication between the lender and the borrower, ensuring that both parties are kept informed throughout the process.
At TheBroker.ca Ltd., we take our responsibilities seriously. We strive to provide a seamless and transparent mortgage process for both borrowers and lenders.
The process of obtaining a private mortgage involves assessing the risk associated with the mortgage, by performing an assessment of the property’s value and the borrower’s ability to repay the mortgage. This can be less cumbersome than securing a traditional mortgage. This streamlined focus can make the approval process quicker and easier.
When getting a private mortgage through a mortgage broker, it’s vital to make informed decisions. The borrower should ensure the broker is licensed and in good standing with regulatory bodies. Understand the impact of the mortgage on your financial situation by having the broker explain the terms, including interest rate, repayment schedule, mortgage term, and any associated fees. Review all paperwork thoroughly and don’t rush into signing anything. If something is unclear, ask for clarification. Remember, this is your mortgage, and you have the right to fully understand every aspect of it.
Pricing of Private Mortgages
The pricing of private mortgages is primarily based on the risk associated with the mortgage. Here’s how it works:
Risk is the primary factor that private lenders consider when pricing their mortgages. This includes:
- Property Value: The value of the property being mortgaged plays a significant role in determining the risk. Properties with high value are considered lower risk as they can be sold to recover the mortgage amount in case of default.
- Loan-to-Value Ratio (LTV): This is the ratio of the loan amount to the appraised value of the property. A lower LTV indicates lower risk for the lender.
- Borrower’s Creditworthiness: While private lenders are more flexible than traditional lenders, they still consider the borrower’s credit history and ability to repay the mortgage.
Based on the assessed risk, private lenders set an interest rate for the mortgage. Higher risk mortgages typically come with higher interest rates to compensate for the potential risk of default.
Private mortgages may have various fees, such as broker fees, lender fees, and legal fees. These are usually a percentage of the mortgage amount and are used to cover the costs associated with originating, underwriting and managing the loan.
It’s important to note that the terms and pricing of private mortgages can vary widely between lenders. Therefore, working with a knowledgeable broker like TheBroker.ca Ltd. can help borrowers navigate this landscape and find the most favourable terms for their situation.
An exit strategy is crucial when considering a private mortgage. Given their short-term nature, borrowers must have a plan for repaying the mortgage at the end of the term, whether it’s through selling the property, refinancing, or other means.
If you’re considering a private mortgage, it’s essential to work with a knowledgeable broker who can guide you through the process. At TheBroker.ca Ltd., we’re experienced in all types of mortgage financing including private mortgages. Reach out to us, if this is a financing option that you are considering. We are ready to guide you through the process, answer your questions, and provide personalized assistance. We are committed to helping our clients understand their options and make informed decisions about their financing needs.