What is a Private Mortgage?
With the mortgage rules constantly changing, private or alternative mortgages are becoming the only way some people can refinance or buy a home. When the banks turn borrowers down the next option is to look at “Subprime” lenders. There is a significant misconception applied to this “subprime” market, so let me explain them a bit.
Many believe alternative or private mortgages are only for bad people, but don’t let the word “subprime” scare you, these lenders are in no way inferior to banks. Canada’s lending practices are very strict and all federally regulated, these “subprime” lenders are simply an alternate option for mortgage products to cover an area of lending that the banks will not.
What is Private Mortgage Financing and who uses it?
Private mortgage financing can be an excellent alternative for those that are:
1. Self-Employed and declare little or no income
2. Micro-condos that are less than 600sqft
3. Foreign investors
4. Non-residents of Canada
5. Credit Challenged
6. Owe CRA back taxes
7. Property Taxes that are in arrears
8. People going through a foreclosure
9. Construction financing and commercial loans
10. Equity takeouts for starting a business
11. Short term financing that is open and without penalties
12. Don’t want to refinance their 1st bank mortgage as the penalties are too high.
13. Requiring funds up to $20 million dollars
Banks, and many brokerages, don’t specialize in private financing. It is a more specialized area of mortgage financing and must be handled differently. If a mortgage for private lender’s is submitted without care and due diligence, it may result in higher rates and hefty fees!
When applying for a traditional mortgage (based on T4’s, good credit, and saved down payment) the CLIENT is qualified based on the PERSON first, then the property. When you apply for private financing, the PROPERTY is qualified for the mortgage first and then a few details about the client are reviewed and qualified.
When it comes to alternative or private mortgages a property in a marketable area are ideal. The risk is lower, so they can offer better rates and larger mortgage amounts. That’s not to say properties in small communities can’t be financed, there are options for those as well.
Valuable and marketable properties can get financing with 15-20% down, but you can expect to pay 2-3% higher rates than if you have 25% down, as there is more risk taken by the lender in these cases. The bonus of course, is that you can opt to pay “interest only” and it can be fully open so you don’t have to pay the penalty to break the mortgage.
There are always fees for private mortgages, fees depend on your broker and lender, the fee can be anywhere from 0.5% to 5% of the amount you’re borrowing; the average is 1% (for example: $400k mortgage would have a $4,000 fee), so it is good to ask the fee costs upfront and ask a few brokers that specialize in private financing.
If you get short term (1-2 year) private financing, as your mortgage agent, I want to ensure we have a plan in place it have the mortgage moved to a traditional low rate mortgage as soon as possible. This is especially true if the reason for the private financing is credit, income or back taxes. We will work together to ensure this plan happens and is followed through.
There are many private lenders and their rates, fees, and what they will fund, vary extensively. Contact me any time so that I can help you find a reasonable solution that your bank can’t offer you.