A private mortgage is a home loan issued by a lending institution that’s not represented by a traditional bank, credit union or monoline lender. These lenders are secure loan providers that are legally allowed to lend mortgages in Canada.
Private mortgages are short-term and typically lend on one-year terms at a higher interest rate compared to prime A and B lenders (i.e., banks, credit unions, etc.), plus a fee of 1% to 2%. Private mortgages are usually interest-only, meaning that homeowners don’t have to pay down the principal of their mortgage each month, but instead only have to pay monthly interest payments for the fixed 12-month term. Because of this monthly payments are not as high as one would expect. They are also closed mortgages that you’re able to break, but with a penalty of paying three months interest. In order to qualify for a private mortgage, you generally need at least a 20% down payment or at least 20% to 35% of equity in your home.
Why might someone need a private mortgage?
Private mortgages are a helpful borrowing solution for people who aren’t able to get approved through traditional lenders like banks or credit unions. As mortgage rules in Canada have tightened over the last few years, private mortgages are a helpful mortgage option for various situations such as:
A construction loan for home renovations
Borrowing money, using your home as collateral to increase your mortgage. Borrowed at a lower rate than you would with a PayDay lender
To purchase a new home if you don’t meet the qualifications of a traditional lender.
As a second mortgage, on top of your current bank/financial institution mortgage, to borrow more money against your home
A bridge loan if you need funds to finance a new property
Three reasons to use a private mortgage lender
1. You need some extra money
Private mortgages are often used as a way to borrow money in a time of need. Because lenders do not grade home owners based on income, but instead their home value, many people who take out a private mortgage to support their livelihood.
2. If prime A and B lenders turn you down based on salary or credit score
A traditional mortgage is graded against the property and the borrower. In a private mortgage, lenders use the home as collateral. In other words, they will typically lend you up to 80% of the value of your home, which is solely based on the property and rarely based on other factors like income and credit score. So, if your household income is too low or you have a poor credit situation, you can still qualify for a mortgage. This is a great option for someone who recently lost their job or had to declare bankruptcy.
3. You need a loan quickly
If time is of the essence and you need to get a mortgage fast, private mortgages are a lot less bureaucratic and can be processed a lot quicker than conventional mortgages. In some cases, private lenders can lend in just a few days.
4. You need a short-term loan
The criteria to qualify for a private mortgage is more flexible compared to that of a traditional A or B lender. If you’re in the process of rebuilding your credit, or you may not have enough household income at the moment, this short-term solution allows you to still qualify and get your finances in order at the same time.
5. You have a mortgage with a prime A or B lender, but need a second mortgage
While the best option is usually to refinance your mortgage with your current lender, if a homeowner does not have the household income to support taking out more against the value of their home, prime A and B lenders will generally not allow for a refinance. A private lender, however, weighs their lending criteria against your home, not household income. So, if someone is in need of money from their bank and cannot refinance with their prime A or B lender, a second mortgage from a private lender may be the best option.
How to get the right private lender for your needs?
There are many private lenders across Canada. They often have different guidelines, rates and features. That’s why it’s important to work with an experienced Advisor to help you through the process and shop around to find you the best available product for your unique situation.
At Homewise, we work with many private lenders and would love to help you with the process if this is something that you need. You can apply directly on our site in minutes here.