Whenever you make a big investment, you want to feel secure in the fact that you properly weighed all your options and made the best choice for you. After all, this is your livelihood we are talking about!
Many people give up on their dreams as soon as they have been rejected by a few banks, not aware that there are other avenues available to them. Even if you have been approved for a loan by a bank or other financial institution, it doesn’t necessarily mean that it’s the best you can do in your specific situation.
After all, mortgages usually have very long terms, are rigid and inflexible, and can take a very long time (and a lot of effort) to secure. That’s if you even pass the rigid requirements that banks impose when evaluating someone for a loan.
A private mortgage is one option that’s regularly overlooked by new investors or the average layman looking for a loan on a family home. Many people are also turned off because they see them as inherently risky. However, private mortgages are a valid alternative to traditional financing and may even be better under your specific circumstances.
What is a private mortgage lender?
A private mortgage lender can come in many shapes, forms, and sizes. It can be made up of either an individual or group of people. Technically, any financing from a private source fits the description but the popularity (currently 40% of mortgages are private in Canada) has seen it grow into a real industry with real professionals.
As they are not tied down as much to other national and state regulations, they are a lot more varied and flexible in their offerings. Typically, these are businessmen and investors who are in it to make as big a profit as possible.
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A side by side comparison of private mortgage lenders and banks
|Traditional Financial Institution||Private mortgage lender|
|Requirements||Typically, private mortgage lenders are investors looking to make a profit, just like you. This means they tend to focus more on the potential payoff and success of the investment.||Banks base their loan or mortgage decisions on the reputation of the borrower. One very important factor is your credit score. Other things include your current debt to income ratio.|
|Limits or regulations||The sky’s the limit when it comes to private mortgages. It’s one of their main benefits that they aren’t tied down by state or national regulations. Although they are still regulated by some agency, such as the FSCO for Ontario.||Loans and mortgages have limits and minimum amounts set by the CMHC and OSFI. Things such as a minimum down payment, a maximum loan amount, etc. are prescribed. Some of the borrower requirements are also imposed.|
|Geographical limitations||Private mortgage lenders tend to have a scope of operations in which they are willing to consider a loan.||Banks or other traditional financial institutions offer the same packages nationwide wherever they have branches.|
|Terms||These loans are generally given for a shorter term of 1 month to 2 years. Interest-only is sometimes available.||Loans can be anywhere from 5 to 30 years. Interest-only is sometimes available.|
|Interest rates||Interest rates are on average higher at 8-12% which is more than double what banks offer.||Interest rates are low at between 2 and 4% for Canadians.|
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