Private mortgage lenders offer short term loans typically a term of between six months and three years. The borrower is not required to pay back the principle. The result is lower repayments, as he simply pays back the interest.
Private Mortgages are Short Term Loans
As Canadian banking controls become stricter and the criteria for qualifying become more stringent, more and more people are finding it increasingly difficult to access a bond through the bank. Yet most would love to buy a home. This is why the private mortgage industry is growing so rapidly. In 2015 this industry was already responsible for between four to five percent of mortgages in Canada, and this number is believed to be growing.
Private mortgage lenders offer short term loans typically a term of between six months and three years. The borrower is not required to pay back the principle. The result is lower repayments, as he simply pays back the interest. Over the term of the loan the borrower should work on improving his credit rating and his home equity because the aim should be to qualify for a conventional loan at the end of the term.
Circumstances Demanding Private Mortgage Use
Private mortgages are generally used in the following circumstances:
- When borrowers do not qualify for a conventional loan either because their credit scores are too low or because they are unable to prove their monthly income as can happen to the self-employed and commission earners
- When borrowers are not Canadian residents
- When borrowers wish to consolidate debt, and pay off higher interest credit
- To cover taxes, or to prevent foreclosure
- When borrowers wish to invest in property or renovate and flip a property using a second mortgage
- When borrowers wish to buy an unconventional property that the banks won’t fund
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The Process is Quicker and Easier
Private mortgages are both quicker and easier to obtain. Private mortgage lenders are more concerned with the value of the property and the size of the down payment than in the prior credit history of the borrower. They are interested in the condition of the property, its location and its market value since they use the property as collateral for the loan. They will base their decisions on the loan to value ratio. Institutional lenders on the other hand tend to very rigid and bound by bureaucracy.
Given the higher risk, private mortgages are considerably more expensive than conventional mortgages, with interest rates of ten to eighteen percent. Additional fees such as legal, lender, appraisal and broker fees must also be taken into consideration. These can amount to anything from one to four percent of the loan amount, and are sometimes included in the mortgage amount.
A Broker Will Match You with the Best Lender
If you plan on using a private mortgage you must have a realistic plan for the longer term. A broker can help you to find the right lender. Mortgage brokers are a great help to both lender and borrower. They generally have a wide range of lenders on their books and they can help you to match your needs with the right private lender many of whom specialise. He will also help you to structure your loan and plan the exit strategy.