The number of Canadians seeking a private mortgage has been skyrocketing in recent years. Private mortgages increased by 25.4% in Q2 of 2019, coming to a total of $41.1 billion.
If you’re wondering “What is a private mortgage?”, we’re here to set the record straight. We’ll show you how to differentiate between a good private mortgage and a less than optimal one?
If you’re looking for private mortgage lenders in Ontario, here’s what you need to know to find the best deals!
A private mortgage can come in a number of different forms. The Motley Fool defines private mortgages as “a private mortgage is a loan created between private individuals for the purchase of real estate. The lender, who could be a friend, family member, colleague, or investment firm, will loan the money to the borrower just as a bank would, securing themselves with a mortgage note or comparable contract.”
Private mortgages are generally granted for 3 reasons:
The terms of a private mortgage are usually negotiated around the length of the home loan, the amount of the down payment, the interest rate, and type of loan. There may be additional rules or laws about the maximum interest rate allowed based on the use of the property.
Private mortgage lenders can offer a variety of different types of loans. Some of these include:
Private mortgage lenders in Canada can be an investment group looking for alternative investments. Private mortgages can be beneficial for borrowers and lenders, alike.
Private lender mortgages are often fairly easy to qualify for. Many private mortgage lenders will approve loans with at least 25% available equity. That means any value that doesn’t have any debt against it. For example, a property worth $1 million with a $750,000 mortgage would have 25% equity.
Many private mortgage lenders in Canada will ask that you have a property evaluated as part of the mortgage agreement. Or they could consolidate the assessment fee into the startup fee for your private loan. Getting a current evaluation is an important part of determining the size of the loan you’re eligible for.
Most private mortgages are given for residential properties. For commercial property mortgages, the equity rate is often a little higher, commonly around 35%.
This arrangement is part of what makes private mortgages different from a traditional lender. Canadian private lenders usually focus mainly on the current market value of a property and equity when considering approving a loan. Banks, on the other hand, are much more likely to assess credit history as the determining factor in whether or not you qualify for a loan.
That means if you have credit card debt, you can still qualify to receive a loan from private mortgage lenders for bad credit.
Private mortgage lenders use a metric called Loan To Value (LTV) ratio to determine if a property is a worthwhile investment. To determine the LTV, divide the existing mortgages on a property by the market rate. For a property worth $1 million with existing mortgages of $800,000, the LTV would be 80%.
An LTV of 80% or lower is a common private loan requirement. Some private loan lenders will extend a private mortgage for LTVs of 85% to 90% for a refinance. A rate of 80% LTV is common for purchasing a home.
Many private loan providers are interested in solid investments. A high LTV means a borrower already has a large amount of pre-existing loans taken out against their property. In the instance the borrower defaults on their mortgage payments, the primary mortgage lender would be paid back first. Properties with high LTVs are less likely to recoup their investments.
LTVs aren’t the only criteria that determine private mortgage rates or interest rates. Having a steady income will help you get the best mortgage rate possible, as will having a solid credit score.
Private lender mortgages can be advantageous for borrowers and lenders alike. They’ve been a popular alternative to traditional mortgages for decades for a number of reasons.
Private mortgage requirements are much more flexible than those from a traditional lender, whose strict criteria are also known as a stress test. This makes them one of the prime reasons why homeowners get private mortgages. Perhaps you’re in the process of rehabilitating your poor credit, or maybe you’re looking into a private mortgage for debt consolidation.
Private mortgages involve less paperwork than traditional mortgages, as well. Private lenders don’t have to deal with large financial institutions than banks do. This also makes them advantageous for people with an unconventional financial situation, such as those who are self-employed or with short credit histories.
A private mortgage can sometimes feature more beneficial terms than conventional loans, as well.
It’s usually easier to get approved for a private lender mortgage than a traditional loan. Private lenders are often solely in the business of issuing mortgage loans. This makes it far easier for them to streamline their approval process than traditional banks or money lenders.
Traditional mortgages are often restricted to a few common forms. This means you’re severely restricted in the terms that are available. Private loans are able to be much more flexible, giving you more options towards finding terms that meet your specific needs.
Homeowners that meet three main criteria are the most likely to get an optimal rate from a private lender. The first and most important is a low LTV ratio. As a general rule of thumb, the lower the LTV ratio, the lower the amount of risk for the lender. It means the borrower already has a decent amount of equity invested in the property, which greatly improves the odds of the lender recouping their investment.
The second most important factor in obtaining an optimal interest rate is your income. This also helps ensure that the private loan will be a good investment for the lending institution.
The third factor that lending institutions look at for determining a mortgage rate is credit score. A high credit score means you’re able to pay your bills on time. This is also a sign to potential investors that your private mortgage is a sound investment.
A good credit score isn’t universal. As a general rule of thumb, a good credit score in Canada is 700 or higher. 900 is considered perfect credit. 550 – 700 is considered fair credit. Many traditional lending institutions will still give a mortgage for fair credit, albeit at a higher interest rate.
That means if you’ve got bad credit, private mortgages can sometimes offer a better deal to the borrower.
There are a wide variety of reasons you might be seeking a private mortgage.
One of the most popular reasons is that private mortgage lenders can be far more lenient than traditional lenders. This means you’re far more likely to qualify for a short term loan in case of unforeseen circumstances such as debt consolidation, to help bring down the balance on high interest credit card bills.
Seeking home repairs or renovations is another common reason for seeking a private mortgage. Not all mortgages will cover repairs or renovations. You often have to specifically seek out a special type of mortgage, known as a Renovation Mortgage or Renovation Loan.
Unforeseen unemployment or unexpected expenses are also common reasons to seek a private mortgage. Private mortgage lenders are often issued for short term loans. They’re also far more commonly available for borrowers with extenuating financial circumstances such as being self-employed or having an imperfect credit history.
Private mortgages can often be approved much more quickly than a more traditional loan. This makes private mortgages far more desirable for those looking for income or a line of credit in a hurry. A private mortgage can even be an investment in and of itself, if you find a particularly good deal your mortgage will help you take advantage of.
It’s not uncommon for people to juggle multiple types of debt in this day and age. Traditional lenders don’t always take this under consideration, however, making it difficult to leverage real estate or home equity to help pay off debt. If you’re smart, you can even use your 2nd mortgage to pay off an existing mortgage and student debt.
Selecting a private mortgage isn’t that different from choosing a traditional loan. Figuring out how much you can afford, over what period of time, is the first and main concern. Calculating private mortgage lenders rates is easier said than done, however.
A tool like a Home Equity Loan Calculator can help you figure that out.
If you’re seeking a private mortgage for a more specialized need, you can also use specialty tools like a Second Mortgage Calculator.
Once you have an idea of what you can afford, this can help you prepare to seek out the best terms you can find. Saving for a while to make a down payment may help you get a better rate on a private mortgage. This can help you get a better LTV ratio, which can help you negotiate lower interest rates, just like with a traditional mortgage.
These factors can help you determine the optimal criteria for a private lender. Traditional mortgages are almost always long-term, such as the 30 year mortgage.
Private mortgages can come in a variety of lengths, however. Private mortgages can be for as short as 3 months and up to 2 years. Most private lenders offer a 1 (one) year term by default.
All of these factors can help you determine the best interest rate. The interest rate is probably the single most important factor in choosing a mortgage.
Mortgage rates are constantly shifting. To find the best rate on a private mortgage, it’s a good idea to watch interest rates for a while to get an idea of the market.
Private mortgage interest rates can vary a great deal. Typically, the private mortgage interest rate for first mortgages ranges between 3.99% to 7.99%.
For second mortgages, the interest rate can range from 5.99% to 12.99%. Use the second mortgage calculator to calculate your second mortgage payment & rate.
Private mortgages require far less documentation than traditional loans. Equity is the thing most private mortgage lenders are concerned with. For a refinance or cash out, mortgage lenders will need to see what kind of assets you’re bringing to the negotiations. Many private lenders will want up to 35% equity for refinancing loans.
For fixer-uppers and properties intended to be flipped, many lenders will want to see that the after-repair value will yield at least 35% equity.
Your credit score isn’t a factor in securing a private mortgage. Having a good credit score or solid credit history may help you secure a better rate for your loan, however. You’ll want to bring some proof of credit and income when securing a private mortgage.
Many private lenders will ask to see three months worth of bank statements as evidence of your financial history. For commercial properties, lenders may want to see a rent roll to help determine your ability to make your interest payments.
For a fix and flip rehab project, lenders may want to see if you have some sort of resources, even if they’ll be bankrolling most of the project. This is in case the project goes over budget.
Private mortgages can be a lifeline in times of economic uncertainty. They can also help you take advantage of the earning and investment potential of properties you already own, or help you get started investing in real estate.
If you’re seeking a private mortgage in Ontario or the surrounding area, contact us today with any questions or to set up an appointment.
Low rates and flexible terms from direct lenders.
Fast mortgage approval and closing in 24 to 48 hours.
Credit is not a factor for getting approved for a private mortgage.
Income verification is not required for private lenders.
Fast mortgage approvals based on equity only.
Private mortgage lenders approved private mortgages in Canada based on equity only. There are no income or credit qualifications required.
We take pride in taking the time and effort to match up every individual homeowner and homebuyer with the best mortgage financing options and rates. With access to more than 200 participating mortgage lenders, there are mortgage solutions for all types of borrowers. We listen and understand your mortgage and real estate goals, and find the best mortgage terms tailored to your specific goals to save you thousands of dollars on your new mortgage.