We’ve talked previously about how some mortgage-seekers don’t fit into the “Lending Box”. For one reason or another, they might just not check off all the boxes or perhaps there is an additional element to their situation that is uncommon. It could also be that due to the tighter mortgage regulations, you may require an alternative solution.
The percentage of mortgage refinancing transactions done through private lenders rose from 12 per cent in the second quarter of 2016 to 20 per cent in 2018, a 67 per cent increase (source)
Private mortgages are meant to be short-term solutions (1-3 years) to help a borrower achieve their goals while improving their credit or for emergency lending solutions. A few examples of when private lending would make sense:
- Borrowers who have damaged credit in need of repair
- Self-employed individuals who have unpredictable income
- Unique properties like mobile homes or micro-condos (less than 600 sq feet) that can’t be financed or refinanced through a bank.
- Property details/description of the property
- Second mortgages or Investment properties
- Construction financing that may not fit within a conventional lender
Private mortgage lenders are typically more lenient and will place more weight on the property itself and the down payment plus the client’s ability to repay the loan. To read more about various considerations, click here.
With private mortgages, there are things to keep in mind. As the lender is taking on higher risk, the interest rates can be considerably higher than a traditional mortgage. Additional fees can also be involved including:
- Lender fees
- Broker fees *this are often covered in a traditional mortgage, but in this case the borrower will typically have to cover the cost.
The legal and lender fees will amount to anywhere between 1-4% of the loan amount, but this can be rolled into the mortgage as well.
Remember, this type of loan is meant to be short-term and a steppingstone to move towards a more traditional mortgage product. If you are considering a private loan, a mortgage broker can help you discuss and evaluate if this type of mortgage would be a good fit for you.