I am sure that if you have watched CP24 by now, you have seen Oliver the Jeweller or another pawn shop offering private mortgages that close within 24 hours and that will fund any mortgage there is. Unfortunately, most people only learn about private lending when they are in a scenario that requires it. I am here to shed some light on the shadow world of private lending; to show you that private lending is a useful financing option for short term mortgages, unique situations and in emergency situations. As a disclaimer, not all brokers and private lenders are made equal. It is important to work with the professionals at Mortgages.ca, as we are high integrity and customer-focused brokers that are not in this business for a quick buck.
Some of you may have heard about private lending in the news after the stress test came into effect in 2016/2017 as a shadow-subset of the mortgage industry that skirts the rules of the government and offers high interest risky mortgages to people who dare to apply with these unscrupulous figures. That description sounds more like an episode of the Sopranos than a true depiction of what private lending is and how private individuals fit into the lending landscape in Canada.
What is Private Lending?
Private mortgage lending is facilitated by a mortgage professional and a private individual or group of private investors. A group of private investors that choose to deploy their capital in mortgages often join a Mortgage Investment Corporation or MIC. These organizations originate mortgages and diversify risk by deploying investments into a variety of different mortgages. This is not to be confused with a syndicate mortgage, where a series of private individuals pool together funds for an individual transaction.
Why Choose Private Lending?
There are certain real estate transactions that do not work at A lenders or B Lenders. The type of risk involved in these transactions is often too great to fit within the business model of institutional lenders. For example, if an investor is purchasing a property in bad shape and looking to renovate the property to then sell it, often called a flip – poses a much greater risk to a lender than lets say a cookie cutter first time home buyer. These flips, often require a much shorter term prior to an exit, sometimes within 12 months or less. This short period of time creates a disadvantage to a lender offering sub-3% rates compared to a first time home buyer who will sign up for a 5 year fixed.
Another example includes certain types of deals/property types – for example, if a person wants to purchase raw land, these deals if at all, will only be financed at very low loan to values at banks/credit unions and sometimes they will turn them down all together. For unique deals, for example purchasing a co-op property or a hotel residence within a rental pool, a restricted resort style property – private lending may be the only option.
In emergency situations, sometimes in the process of a live deal – material changes can occur which will disqualify an applicant from their approved mortgage. If someone loses their job during the transaction, receives a pay-cut/reduced hours, the down-payment funds expected from a gift are no longer available, the sale of an existing property falls through and many more are reasons where out of the box scenarios that pose risk to lenders may fall in the hands of a private lender.
At Mortgages.ca we work our way down the conventional food chain of lenders to get our clients the least expensive option for their scenario. If we get a decline from an AAA lender we will try to get approved at a B lender or try to structure the file differently, with a co-applicant or guarantor etc. If we exhaust all other options or your financing requirements are too unique for conventional lenders we will be able to source you a private mortgage from a trusted partner.
Private mortgages have higher interest rates than other types of mortgages because of the risk each file poses to the individual or group of investors. Rates are typically determined based on the level of equity that exists in the transaction. The higher the level of downpayment, the lower the interest rate. We work with lenders that offer rates as low as 4.95% for mortgages at less than 50% LTV. These rates increase to up to 75%-80% on a first mortgage to 7.99% and more and second mortgages up to 85% at 12.99% (not including fees).
These rates are high, yes, but they are also typically set up as interest-only payments, which from a cash-flow perspective can really benefit you as the client. A 500k mortgage at 6.99% would cost approximately $2912/month versus a regular bank mortgage of 500k at 1.59% of $2020/month. Oftentimes people swallow the cost of this, as it’s typically set up as a very short term solution, where an exit strategy is discussed up front to lower costs over time.
Unlike conventional banks and B lenders, there is no direct compensation for your mortgage broker from a private lender. You will always be charged a fee from a broker arranging a private mortgage. These fees may vary based on loan size and complexity typically from 1-2% for loan sizes over 200k and higher to meet a minimum fee amount for loan sizes less than 200k. Private lenders also charge fees, these range from 1.5-3% typically and along with the broker fee are taken from the advance of the funds. Dealing with a professional, like the pros at Mortgages.ca will ensure you are treated fairly and equitably with a strategy that is transparent and that you are comfortable with.
Mortgage Hack: Do you have a private deal where you are being charged higher fees or rates listed above? Feel free to get a second opinion from the high integrity brokers at Mortgages.ca. We have saved clients thousands of dollars and protected consumers from predatory lending practises.
What to Look Out For?
Not all agents and lenders are made equal and there are some people out there who do not act with the same integrity as us at Mortgages.ca. Predatory lending practises occur when a private investor chooses to finance a property they wish to take-over from the client in the event of a default. Once a client starts missing mortgage payments, a private lender can start racking up fees/interest charges to capture the remaining equity and force a Power Of Sale or Judgement Proceeding.
Some brokers will also charge exorbitant fees in order to arrange financing because they know the client is in a bind and has nowhere else to turn to. The unique nature of the transaction and the direct relationship between the broker and the lender create the potential for taking advantage of unsuspecting clients. If you are in a situation where you would like to learn about your options, run it by the professionals at Mortgages.ca, we will provide you honest advice with no strings attached. Don’t believe me, take a look at what some of our customers have to say!