Securing a mortgage at the best of times can seem daunting but thanks to elevated home prices and tighter policies surrounding mortgage qualification – including the stress test – the process has become more challenging for many Canadians. If you’re in the market to buy a home, but you’re not likely to qualify for a traditional or even an alternative mortgage, there are private mortgage options available through private mortgage lenders — an option gaining traction in response to federally mandated stress tests for uninsured loans.
A private mortgage is becoming an increasingly popular solution for many homebuyers. A growing number of Canadians are turning to private mortgage lenders (as opposed to banks, credit unions or trust companies, for instance), because they’re less concerned about traditional criteria such as credit scores and down payments. Instead, private mortgage lenders prefer to focus on the property’s overall value and marketability. They tend to be more comfortable lending in predictable markets, which is advantageous if you’re looking for a home and require a private mortgage in Ontario within a major urban centre where properties tend to hold their value.
How does private lending work?
A private mortgage is an interest-only loan with a short term, typically ranging from three months to three years – with one year being the most popular term – although some private mortgage lenders may offer long-term solutions. During the term, you’re only required to pay the interest each month, and the principal stays the same.
Ideally, a private mortgage offers a temporary solution until you can get your affairs in order. The theory is that, by the end of the term, you’ll be able to transition to either an alternative or traditional mortgage and pay lower interest.
While the less stringent qualification criteria and ease of qualifying is appealing, private mortgages carry higher interest rates – typically ranging from 10% to 18% – to offset the greater risk they present to lenders. You can also expect to pay a lender’s fee associated with the loan as well as your mortgage agent’s fee (usually between 1-3% of the loan), unlike with a conventional lender, where a mortgage agent’s fee is covered by the lender.
When to consider a private mortgage
In addition to easing the mortgage qualification process, there are a number of other reasons why you may want to consider a private mortgage.
Here’s an overview of some of the key motivations for taking out a private mortgage:
- Bruised or bad credit
- Unable to demonstrate income stability (eg, self-employed, irregular income)
- Unlikely to pass federally-mandated stress test
- New to Canada and lack credit history
- Looking at an unconventional property that traditional lenders won’t finance
- Require quick financing (eg, you bought a new property before selling your current home)
- Need time to increase down payment or repair credit
- Require short-term financing/plan to keep the property for a short amount of time
- Home renovation mortgage/debt consolidation mortgage
- Paying off mortgage arrears/property tax arrears/income tax arrears
While it’s always recommended to use the services of a mortgage agent, the complexities associated with a private mortgage make it even more important to do so. At Approved Equity, we’ll help you determine whether a private mortgage is right for you and guide you through the entire process. Because we offer a broad range of affordable mortgage solutions to meet your unique borrowing needs, we’ve built excellent relationships with a network of reputable private lenders so you always secure your best mortgage.
Have questions about how a private mortgage may be able to help you or regarding your mortgage in general? Answers are a call or email away.