A mortgage to acquire a new house or another real estate investment is the requirement most people look at in traditional financial institutions such as banks or credit unions. Since these are private lenders who make mortgages outside the mainstream financial institutions, they could present perfect solutions for some; however, it helps to understand the pros and cons, risks, and benefits associated with this option before proceeding for private lending in Canada.
What is a Private Mortgage in Canada?
A private mortgage is a loan given by private lenders, such as individuals, companies, or sometimes mortgage syndicates and usually MICs—Mortgage Investment Corporations. Unlike banks and traditional financial institutions, private lenders set their own terms, conditions, and approval criteria.
Private mortgages are shorter-term solutions from 3-6 months to a maximum of 2 years. They often require higher interest rates compared to traditional lenders and need a clear plan for how to get out of the debt-exit strategy. Payments are usually purely interest-only, in which you only pay the interest during the term without any reduction of the principal loan amount. At the end of your term, you are obligated to repay the full amount borrowed, usually by refinancing, renewing, or selling the property.
Private mortgages are ideal for borrowers who cannot qualify for loans from traditional lenders, otherwise known as A or B lenders. This may be as a result of:
- Need more credit history.
- Unstable or unverifiable income.
- Poor condition/location of the subject property being financed.
List of Private Mortgage Lenders in Canada
While selecting a private lender, make sure that he is reliable. It is also a must to compare interest rates, fees, and terms. One should also have a repayment plan in full readiness.
Here’s a list of some of the well-renowned private mortgage lenders in Canada:
- Alpine Credits
- Alta West Capital
- Atrium MIC
- Bridgewater Bank
- Canadian Mortgages Inc. (CMI)
- Capital Direct Lending Corp.
- Clover Mortgage
- Ginkgo MIC
- Haventree Bank
- HomeEquity Bank
- JV Capital
- New Haven Mortgage Corporation
- Prudent Financial
- RiverRock MIC
- Royal Canadian Asset Management Inc.
- ThreePoint Capital
- Vault Mortgage Corp.
- Westboro MIC
Please note that this is not an exhaustive list, and availability may change at any time. For the most current list, refer to the resources provided by the Canadian Mortgage Brokers Association.
Advantages of Private Mortgage Lenders
- Flexible Requirements –Private lenders are mainly concerned about your equity and payback ability, not necessarily about your credit or income position. This makes private lenders a suitable option for borrowers with special circumstances.
- Faster Approval – The approval process is often quicker than traditional banks so that you can get your funds faster.
- Funding for Unusual Properties – Private lenders are more open to financing non-traditional or unique properties that regular banks might not approve.
- Possibility of Less Stringent Collateral Requirements – Private lenders might be more attracted to the amount of equity that exists in the property than your credit score or income record. This can be a highly attractive aspect for those buyers who have lots of equity in the house they are buying.
Negative Aspects of Private Mortgage Lenders
- Shorter Loan Terms – Private mortgage lenders usually have short loan terms that fall between one and five years. It may not be helpful to those who need a second mortgage for a more extended period. When you cannot refinance or pay the loan in the agreed-upon period, you may face high interest when applying for another loan. Private mortgages are often at higher interest rates, making them more expensive than loans from conventional banks.
- Additional Fees – In addition to other costs, you may be responsible for other charges, such as lender, broker, legal, or origination fees.
- Risk of Property Loss – They might be quicker to foreclose if you are delinquent on your payments, which could further put your property at risk.
- Less Oversight – The private lending arena is not as heavily policed as traditional banking, which can lead to the discovery of rogue or predatory lenders.
- Fewer Consumer Protections – Borrowers enjoy less legal protection and oversight than conventional lenders.
Potential Risks of Private Mortgage Lenders
While private mortgage lenders can make financing faster and more flexible, several risks must be taken before committing to a loan.
- Chances of Predatory Lending – Worryingly, some private lenders will engage in predatory practices, such as charging extravagant fees or terms deliberately set to trap borrowers in an unaffordable debt obligation. Always make sure to do your research on the lender and read all the fine print before agreeing to a loan.
- Risk of Foreclosure – Private lenders worry less about creditworthiness and use the value of your property more to decide whether to lend. Remember, however, that in case of a missed payment or other non-compliance with the loan’s terms, the private lender can seize property to recover its money.
Benefits of Private Mortgage Lenders
Despite the dangers, there are some serious benefits involved with private mortgage lenders that can make them suitable for specific borrowers:
- Speed and Efficiency: If time is of the essence, private mortgage lenders can close deals much faster than traditional banks, allowing you to secure a property quickly.
- Personalized Lending: The flexibility of private lenders can be invaluable for those with unique needs or financial situations.
- Accessibility: It is more accessible for those who have declined a mortgage from regular banks, especially for self-employed clients or those having unique credit profiles.
Conclusion
In Canada, private lenders offer borrowers who might not be eligible for conventional mortgages another source of funding. These loans should be considered a short-term option with a sound exit strategy, even though they provide a more specialized approach that can be better matched to certain properties, situations, and borrowing needs.
Working with trustworthy private lenders is advised. Before committing to this kind of financing, make sure you comprehend all relevant rates, fees, and mortgage contract requirements.
