Acknowledged as the biggest investment most people will make in their lifetime, the purchase of a residence is also what most young people aspire to, so what do you do if you simply don’t qualify for a traditional mortgage?
Government regulations on mortgages and qualification requirements stringently applied by mainstream lenders in Canada are making it increasingly more difficult for people to qualify for a standard mortgage.
Private Mortgage Lenders’ Rates
Private investors are prepared to trade higher risk for higher returns. They realise that the strict criteria applied by the banks is preventing people who are able to pay back loans from borrowing. Those prepared to pay the higher lenders’ rates may qualify for a private mortgage.
Private mortgages make up around four to five percent of the property loan market in Canada. These loans are generally taken over the shorter term, somewhere between one and three years.
The borrower is not expected to pay back the principal. Paying only the interest means that the amount that has to be paid monthly is reduced. Because this is a short-term mortgage, the borrower should have a long-term plan in place.
When It Is Difficult to Get a Mortgage Through Mainstream Banks
Circumstances that create the need for private mortgage lenders.
- The borrower does not qualify for a mortgage due to poor credit history
- Funding for unconventional homes that the banks will not cover
- The borrower is self-employed and unable to provide proof of steady income
- The borrower is recently employed, or temporarily out of employment
Private mortgages may make it possible to take advantage of circumstances.
- Second mortgages for home improvements prior to selling
- Second mortgages to top up the first where the buyer cannot make up the difference between the seventy or eighty percent mortgage and the purchase price of the property
- For construction projects to circumvent restrictions placed on these projects by mainstream funders.
Private mortgages are normally more quickly and easily obtained than conventional mortgages as the providers of these funds are happy to use the property as security. The decision will be based on the intrinsic value and location of the property. The creditworthiness and income of the applicant is less important to the lender as the property secures the mortgage. Typically, a mortgage will only cover 85% of the value of the property, and the borrower will be expected to make a down payment. The bigger the down payment the less the risk to the investor.
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Private Mortgage Lenders’ Interest Rates
As with all investments, the private lender will expect to receive higher interest rates for higher risk so the private mortgage does come at a cost. The interest rates are usually between ten and eighteen percent per annum. Obtaining the private mortgage can also run up additional costs of between one and four percent of the total loan amount for legal, broker and lender fees, but they are a great solution for home owners who are facing foreclosure, who have property tax arrears or who need an opportunity to improve their credit rating.