Real Estate

Pros and Cons of Private Mortgage Lenders

Pros and Cons of Private Mortgage Lenders
Written by
  • Ashley Howard
| 27 May 2024
Reviewed, 28 May 2024
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    If you face difficulties getting approval from traditional lenders, you may consider turning to private mortgage lenders for financing. These lenders offer an alternative option for individuals unable to meet the strict income, employment, and credit history qualifications of mortgages from prime or subprime lenders.

    Whether you’re a first-time buyer in the housing market, an investor looking to diversify your investments, or facing credit difficulties, we will take a look at the advantages and disadvantages of utilizing private lending for your mortgage.

    Key Takeaways

    • Private lenders provide alternative financing options to those unable to meet the qualifications of prime or subprime lending. 
    • Private mortgages have higher interest rates and additional fees than A and B lending, which could significantly increase the overall cost of borrowing.
    • Borrowers should view private mortgages as a short-term or temporary solution and have a plan to pay off the mortgage or move it to an A or B lender at renewal.

    Understanding Private Mortgages in Canada

    A private mortgage refers to a loan offered by a private lender, an individual, a corporation, a mortgage investment corporation (MIC), or a syndicate. Unlike banks and other financial institutions, private lenders are not subject to regulations, allowing them to establish interest rates and qualification criteria and set their own terms and conditions for lending money.

    Many private lenders offer non-income qualified (NIQ) financing for borrowers with no, limited or poor credit history or for properties that may not be eligible for A or B lender financing. Private mortgages are temporary short-term solutions that usually have short terms of 3 to 6 months and a maximum duration of typically no more than 2 years. They have significantly higher interest rates than other lenders, and an exit strategy is necessary. 

    These types of mortgages usually involve interest-only payments, where only the interest is paid without reducing the principal loan amount. This means that at the end of the term, you need to refinance, renew, or repay the original borrowed amount.

    Reasons Borrowers Get Private Mortgages

    In Canada, there are various situations where a private mortgage might be deemed necessary, such as:

    Non-traditional properties: A private mortgage lender may offer more flexibility if you are looking to buy or refinance a property that traditional lenders are unwilling to finance.

    Immediate financial needs: Getting approved for a private mortgage is typically quicker, making it an appealing choice if you need a rapid turnaround.

    Poor, limited, or no credit history: If you have credit issues like a bruised credit history or have declared bankruptcy in the past, you may struggle to meet the strict lending requirements for a mortgage from an A or B lender.

    Short-term financial assistance: A private mortgage can be a viable solution if you need a mortgage for a shorter time frame while you work on improving your credit or income to qualify with a prime or sub-prime lender.

    Pros and Cons of Private Mortgages

    When it comes to private mortgages, there are both pros and cons to consider. It is essential to carefully evaluate both aspects before determining if this option suits your situation.

    Pros of Private Mortgages

    Private lenders are more flexible when it comes to lending. They prioritize equity and the ability to repay the mortgage rather than just credit scores and income. This enables them to consider a broader range of factors when determining if you qualify, making it easier to obtain financing. 

    Moreover, private mortgage applications are usually processed quicker than traditional lenders, giving borrowers quicker approval and access to funds. Private lenders are also more open to financing unconventional properties that may not meet the criteria of other lenders, expanding opportunities for borrowers.

    Cons of Private Mortgages

    Private lending carries a higher risk, leading to higher interest rates than A and B lenders. This can result in a higher overall mortgage cost in the long run. Private mortgage lenders may also charge additional fees, such as lender, broker, legal or origination fees, which can further increase the loan cost. 

    Borrowers must renew, refinance or fully repay the loan at the end of the term, which is typically much shorter than other lenders offer. If unable to do so, the borrower may be forced to sell the property if the lender chooses not to renew or if they do not qualify for refinancing with an A or B lender. Private mortgage lenders may have a quicker foreclosure process if the borrower cannot make payments, resulting in the loss of the property.

    Due to less regulation in the private mortgage industry, borrowers may encounter predatory lenders and unfair lending practices. It’s essential to research and work with reputable and trustworthy private lenders. Individuals who take out private mortgages might not receive the same level of consumer safeguards as those who get mortgages from traditional lenders.

    List of Private Lenders in Canada

    When evaluating a private lender, it is essential to verify their credibility. It is also crucial to assess the interest rates, extra fees, and loan terms and develop a repayment strategy for the end of the loan term.

    The Canadian Mortgage Brokers Association lists well-known private lenders in the mortgage industry. This list comes out each fall, so it’s important to note that this may not be a complete list and is subject to change over time as new lenders enter the market or existing ones leave.

    • 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

    Comparison between Private, A Lender, and B Lender Mortgages

    In Canada, lenders are typically classified into various tiers according to their lending standards and the level of risk involved.

    Prime Lenders (A Lenders)

    Prime lenders, or A lenders, refer to banks, credit unions, and other financial institutions. They have rigorous lending standards and are typically the preferred option for borrowers with good to excellent credit and steady, verifiable income. Government agencies oversee prime lending, and lenders must adhere to strict guidelines.

    Sub-Prime Lenders (B Lenders)

    B lenders are an alternative option for borrowers who may not meet a prime lender’s mortgage criteria. They possess greater flexibility in lending criteria and provide mortgage funding to individuals with substantial equity, net worth, self-employment, or non-traditional income. While these mortgages typically come with higher interest rates than A lending, they are still lower than private lending options.

    Private Lenders

    Private lenders offer greater flexibility and leniency in their lending criteria compared to prime and sub-prime lenders. These lenders will look at the borrower’s equity and repayment capability rather than credit history and income verification. As a result, they typically have higher interest rates to compensate for the increased risk and much shorter mortgage terms.

    Calculating Interest for a Private Mortgage 

    Private mortgage interest is calculated using a simple interest formula. The private lender may offer various options for paying any additional fees, such as paying them upfront, including them in the mortgage amount, or paying them at the end of the term. If the fees are included in the mortgage amount, interest will be applied to the total, resulting in higher interest payments.

    For instance, let’s say that you require a loan of $300,000 from a private lender with a 10% interest rate for 1 year while you improve your credit to meet the requirements of a prime or sub-prime lender. If you don’t have the extra funds to cover the fees upfront, you can include them in the mortgage, resulting in a total loan of $309,000. This loan is interest-only, so you will only be responsible for paying the interest during the year and no principal amount.

    To determine the total interest to be paid within 1 year, follow these steps:

    Determine the monthly interest that will be charged.

    10% / 12 x $309,000

    0.833% x $309,000

    $2,573.97 per month

    Your monthly payments will be $2,573.97. These payments will only cover the interest, and no principal portion will be paid off.

    Next, determine the total amount of interest paid over the year.

    $2,573.97 x 12 

    $30,887.64 per year

    At the end of the 1-year term, there will be a remaining mortgage balance of $309,000, for which you have paid $30,887.64 in interest. Now that the term has ended, you will need to either refinance with an A or B lender, repay the balance completely, or negotiate with your private lender to try and renew the agreement for another term.

    Frequently Asked Questions

    What is the cost of a private mortgage?

    A private mortgage will have interest rates that are much higher than those of other lenders, usually in the double digits or close. However, rates vary greatly based on the lender, current market rates, and your financing needs. Private mortgages often have additional fees, including broker, lender, origination, and legal fees, adding an extra 2-4% to the cost of your mortgage.

    What are the requirements for qualifying with a private lender?

    Since private lending has more flexible requirements than prime and subprime lending, the specific requirements will vary greatly depending on the lender. Some private lenders will be more relaxed with income verification, though you may still need proof that you can repay the loan. Some private lenders will give you a mortgage based on the property’s location, condition, and value instead of your income.

    What happens if the private lender I am borrowing from goes bankrupt?

    If your private lender goes bankrupt, your mortgage may be transferred to another company. The lender will be required to sell off current assets to pay its debts, and your mortgage is considered an asset for the lender. If your lender must sell its assets, your debt can be transferred. The new company must honour the terms of your current mortgage until renewal.

    Final Thoughts 

    In Canada, private lenders offer an alternative for borrowers who may not meet the requirements for prime or sub-prime mortgages. Private mortgage loans provide a more personalized approach that can be customized to suit specific properties, circumstances, and borrowing requirements. However, it is important to consider these loans as a temporary solution with a well-defined repayment plan and exit strategy.

    Before considering alternative forms of financing, such as private lending, it is important to thoroughly understand all associated rates, fees, and terms of the mortgage contract. If you are interested in exploring lending options, contact our team of mortgage professionals to determine if we can provide a suitable solution for your mortgage strategy.