A private mortgage can improve your financial well-being and using a reputable mortgage agent/broker will advise when it is suitable for your circumstances to enter into a private mortgage. Your mortgage agent will also advise a financial action plan to refinance you down the road to return to the prime lending marketplace.
Here are the facts on mortgage lending and when to use a private mortgage:
There are several types of mortgage loans in Canada including first mortgages, second mortgages and lines of credit. As we all know, these are available through well- known prime lending institutions like banks, credit unions, trust companies and independent financial institutions that only deal in mortgages to qualified borrowers.
There are also the institutional “alternative” lenders that have all the products mentioned above, however, they loan their money to individuals who do not meet prime lending guidelines. These loans would be considered “riskier” due to the fact that the borrower may not be able to prove income and may have challenged credit which will not meet the prime lender’s guidelines. These institutions often charge lender fees and higher interest rates. Institutional alternative mortgage lenders are most often used as a temporary solution that alleviates an immediate situation that once resolved, the mortgage is moved to a “prime” lending institution. Often times the alternative lenders restrict their lending areas, loan to value and credit and income criteria.
When a borrower doesn’t meet the alternative lender’s lending criteria, a private mortgage can be arranged for a temporary solution, just like the alternative lender. Investors/Lenders are usually individuals or private corporations, Self-Directed RRSP program lenders, who loan their own personal/corporate funds; believing investment in real estate is stable and want to earn a higher return on their money than they can make at their financial institution. These investors will take a more personal approach to the loan and are ready to hear your story, (usually with a sympathetic ear) and assess the amount of risk that they are being asked to take on. Income and credit is reviewed, but with less stringent guidelines than the alternative lenders. Again, lender fees and possibly brokerage fees will be charged.
Consider this scenario to explore why a private mortgage can work for you.
You worked for the same company for 10 years, they went bankrupt and shut down, it took you 9 months to find another job, but in the meantime, you used up all your savings as your EI payments weren’t enough. Your payments are behind on your $40,000 worth of debts which cost $800 monthly, and you owe $10,000 in property taxes and to CRA. Your house is worth $300,000, your current mortgage is $175,000, you need $50,000 to pay it all off plus $4,000 (estimated) to set up of a second mortgage including legal fees. It makes sense to retain your 2.25% first mortgage in order to give you time to restore your credit history and income. Therefore, a private second mortgage suits the situation. A second mortgage of $54,000 with interest only payments at 11% will cost you $484 monthly, creating a savings of $316 monthly plus CRA and the property taxes are paid off.
Some other reasons to borrow private funds.
- purchase property where you don’t qualify with more “traditional” lenders
- pay off/consolidate debts into your property
- renovate your home
- pay for medical expenses
- supplement your first mortgage
- improve cash flow
- pay off debts to CRA or property taxes
- pay for your children’s post-secondary education
Yes, private mortgages do have higher rates and fees, however, your mortgage agent is obligated to ensure that all parties to the transaction are fully aware of the costs going in and will provide the reason behind choosing a private mortgage. Your mortgage agent will outline why you don’t qualify for a prime or institutional lender at this time and review the financial benefits of entering into a private mortgage. Your mortgage agent will also explain the exit strategy to pay off the private mortgage down the road with the goal to get you back into the prime lending market.
Ask your Dominion Lending Centres mortgage broker if a private mortgage is right for you!
Thank you to my DLC colleague Anne Martin for this article.