Private Mortgages – When are they right for me?
For many, home ownership is a good step towards building a financial nest egg, but what happens when traditional lenders won’t approve you for a mortgage? Until recently, only about 4-5% percent of mortgages in Canada have been from private lenders, but as stricter rules have come into effect, we are seeing that number starting to rise.
Private mortgages are typically interest only loans, but because the lender is usually taking on more risk, the interest rates are higher than a standard (bank) mortgage. This is why most private mortgages are short term (less than 3 years) loans meant to help a person get into a home while giving them time to build towards being approvable by traditional lenders.
Typically speaking, a private mortgage lender is more flexible in their approval process and don’t tend to require as much documentation. As long as you have enough equity in your property or a large enough down payment, you can usually qualify.
So who might need to utilize a private mortgage?
- •Borrowers who can’t get a mortgage through a traditional lender due to insufficient credit.
- •Borrowers who cannot verify their income due to being self-employed.
- •Borrowers that are not a resident of Canada.
- •Borrowers with high risks of being foreclosed on, or have property or income tax arrears.
- •Borrowers seeking a mortgage for specific structures (Mobile home/Tiny Homes (under 600sq ft).
- •Borrowers who are applying for a second mortgage.
Since private mortgages have high interest rates, and typically interest only payments, it is important to note that you must have an exit strategy that you can successfully accomplish before taking on this type of mortgage. People who obtain private mortgages should be prepared to have the ability to be approved by a B lender (subprime lender) or traditional lender (banks) within 2 to 3 years. If this isn’t possible for the borrower, then a private mortgage may not be the right choice.
The decision of whether or not to get a private mortgage is daunting and can be confusing. It is always best to sit down with a professional mortgage agent, like myself, to weigh you options and come to the most appropriate decision for you and your future.
If you require more information, or want to get started, contact me any time!