Private Mortgage Lenders: Pros, Cons, Risks and Benefits

Private Mortgage Lenders: Pros, Cons, Risks and Benefits

Table of contents

    If you are a prospective homeowner who is finding it challenging to get approved by a prime or subprime lender, you may look to private mortgage lenders to finance your home purchase. Private lenders are an alternative solution for those who cannot secure a mortgage without its stringent income, employment and credit history requirements for qualification. 

    Getting a private mortgage can sometimes be the only solution to keep your home or allow you to realize your dreams of homeownership. Whether you’re a first-time homebuyer, an investor seeking to expand your portfolio, or someone navigating credit challenges, we will examine the pros and cons of private lending.

    Key Takeaways

    • Private lenders offer alternative financing options for borrowers unable to qualify for A (prime) or B (subprime) lending. 
    • Private mortgages have higher interest rates and additional fees, significantly adding to the total cost of borrowing. 
    • Private mortgages should be a short-term or temporary borrowing solution and require an exit strategy.

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    What Is a Private Mortgage in Canada?

    Private mortgages are loans provided by a private lender. These lenders can be individuals, corporations, syndicates, or mortgage investment corporations (MICs) that lend money privately, setting their terms and conditions. Private lenders are not regulated like banks and financial institutions, so they can set their qualifying criteria and rates. 

    Private mortgages are short-term or temporary solutions with terms as short as 3 to 6 months and typically no longer than 2 years. They come with significantly higher interest rates than other lenders and require an exit strategy. Private mortgages usually have interest-only payments, meaning you will only pay interest with no principal paid down on the loan amount. This requires you to either refinance, renew, or repay the original amount borrowed at the end of the term. 

    Private lending offers financing options for those who don’t meet the strict lending criteria of A or B lenders. Most private lenders allow non-income qualified (NIQ) financing for borrowers with no or poor credit history, or the condition or location of the subject property may prevent them from going with an A or B lender. 

    Why Do Borrowers Get Private Mortgages?

    There are several scenarios where you may consider a private mortgage in Canada, including:

    • Unconventional property types: A private mortgage lender may be more flexible if you’re interested in purchasing or refinancing a property that is outside the scope of what traditional lenders are willing to finance.
    • Urgent financing needs: The approval process for private mortgages is generally faster, making them an attractive option if you require a quick turnaround and access to funds.
    • Poor or no credit history: If you have severely bruised credit or previous bankruptcy on file, you may find it challenging to meet the strict lending criteria for a mortgage from an A or B lender. 
    • Short-term financing: A private mortgage can be a viable option if you require a mortgage for a shorter period of time while you work on improving your credit or income situation.

    Benefits & Drawbacks of Private Mortgages

    Like any financial product, private mortgages have advantages and disadvantages. Consider both sides carefully before deciding if this solution best fits your circumstances.

    Benefits of Private Mortgages

    • Flexible lending criteria: Private lenders focus more on equity and your ability to repay the mortgage, making them more willing to consider factors beyond credit scores and income. This makes it easier for borrowers with unique situations to secure financing.
    • Faster approval process: The application and approval process for private mortgages is generally quicker than that of traditional lenders, allowing borrowers to get approval and access funds more quickly.
    • Access to unconventional properties: Private lenders are often more open to financing unique or non-traditional property types that might not meet the lending criteria of other lenders.

    Drawbacks of Private Mortgages

    • Higher interest rates: Due to the increased risk associated with private lending, interest rates are typically higher than those offered by A and B lenders, making them a more expensive option in the long run.
    • Additional fees: In addition to higher interest rates, private mortgage lenders may charge additional fees, such as lender, broker, legal or origination fees, further increasing the overall cost of the loan. 
    • Shorter terms: While the short-term nature of private mortgages can benefit certain situations, it also means that borrowers will need to renew, refinance or repay the loan in full at the end of the term. Private lenders can choose not to renew at the end of your term, which could force you to sell your property if you cannot repay the balance in full or qualify to refinance with an A or B lender.
    • Potential to lose your property: Private mortgage lenders may be quicker to foreclose on a property if the borrower is unable to make payments, which can result in the loss of the property.
    • Potential for predatory lending practices: As the private mortgage industry is less regulated than traditional lending, there is a risk of encountering predatory lenders or unfair lending practices, making it crucial to do your research and work with reputable and trustworthy private lenders.
    • Limited consumer protections: Private mortgage borrowers may not have access to the same level of consumer protections and regulatory oversight as those who obtain mortgages from A and B lenders. 

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    List of Private Mortgage Lenders in Canada

    When considering a private lender, you should ensure they are reputable. Additionally, consider the interest rates offered, additional fees, and loan terms. You should also have a plan for how to repay the loan at the end of the term. 

    Below is a list of currently well-known private lenders in Canada’s mortgage industry. When updated by the Canadian Mortgage Brokers Association, you can check out a full list each fall. It’s important to note that this list is not exhaustive, and new lenders may emerge, or existing ones may exit the market or change their offerings over time. 

    • 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

    Private vs A Lender vs B Lender Mortgage

    Lenders in Canada are often categorized into different tiers based on their lending criteria and the associated risk levels. To better understand the role of private mortgage lenders, it’s helpful to distinguish them from A lenders and B lenders.

    A Lenders (Prime Lenders)

    A or prime lenders are traditional lending sources like banks, credit unions, and other financial institutions. They have the strictest lending criteria and are often the lending solution for borrowers with excellent credit and stable, verifiable income. Prime lending offers the most competitive interest rates and more favourable terms as they are regulated by government agencies and follow strict guidelines when approving mortgage applications. 

    B Lenders (Sub-Prime)

    B lenders are an alternative lending source for borrowers who may not qualify for a mortgage with a prime lender. They have more flexibility with their lending criteria and offer mortgage financing to those with high equity or net worth, are self-employed or have non-traditional income. These mortgages typically have higher interest rates than A lending but lower than private lending. 

    Private Lenders

    Private mortgages have the most flexible and lenient lending criteria compared to A and B lenders. These mortgage solutions prioritize equity and the ability to repay the loan over credit history and income verification. These mortgages have higher interest rates than A and B lending to offset risk and have much shorter terms. 

    How to Calculate Interest on a Private Mortgage Loan

    Interest on private mortgages is calculated using simple interest. Depending on the private lender, additional fees can be paid upfront, added to the mortgage amount, or paid at the end of the term. If the fees are added to the mortgage amount, interest will be charged based on the mortgage amount plus the additional fees, meaning you will pay more in interest if you add the fees to your mortgage amount. 

    For example, say you need to borrow $500,000 from a private lender at an interest rate of 10% for a 1-year term while you work on your finances to qualify with an A or B lender at renewal. Assume you don’t have the additional cash to pay the fees upfront and add them to the mortgage for a total loan amount of $515,000. The loan is interest only, meaning you will only pay interest during the year and no principal. 

    You can calculate the interest you will pay over the 1-year term as follows:

    Step 1 – Calculate the monthly interest you will pay. 

    Interest rate / 12 months x mortgage amount

    10% / 12 x $515,000

    0.833% x $515,000

    $4,289.95 per month

    Your monthly payments will be $4,289.95. This is interest only, while no principal amount is being repaid.  

    Step 2 – Calculate the interest you will pay for the year.

    $4,289.95 x 12

    $51,479.40 per year

    At the end of your 1-year term, you will have a remaining mortgage balance of $515,000 and have paid $51,479.40 in interest. At the end of the year, you will either refinance to move the mortgage amount to an A or B lender if you qualify, pay off the balance in full or work with the private lender to see if you can renew for another term. 

    When Should You Choose a Private Mortgage Lender?

    You may choose a private mortgage lender if you need a mortgage and cannot qualify through an A or B lender. You may be in this situation if any of the below apply to you:

    • You have severely bruised credit: If your credit score is below the minimum requirements of A and B lenders or you have an undischarged consolidation loan or bankruptcy on file, a private mortgage lender may be more willing to consider your application based on other qualifying criteria.
    • You have non-traditional or unverifiable income: Those with irregular income streams which cannot be verified with tax or bank documentation may find it easier to qualify for a private mortgage, as these lenders are typically more flexible when evaluating non-traditional income sources.
    • You have debt: A and B lenders have strict lending ratios limiting how much you can afford in housing costs. Private lenders may allow higher debt service ratios or not consider them at all, allowing you to qualify more easily.  
    • You’re looking at an unconventional property: If you’re looking at properties that fall outside the lending criteria of A and B lenders, a private mortgage lender may be more open to financing your purchase as long as it can be resold if you default on the mortgage terms and conditions agreed with your private lender. 

    Frequently Asked Questions

    How much does a private mortgage lender cost?

    Private mortgage lender rates are typically higher than those of other lenders, so you could have an interest rate close to or in the double digits based on the lender, the current interest rates, and your situation. Private mortgages often come with additional fees like lender, broker, legal, and origination fees, which could add an additional 2-4% to the mortgage amount.

    What do you need to qualify for a mortgage from a private lender?

    Private lenders have more flexible lending criteria than other lenders, and the specific requirements for qualifying will vary by lender. Private lenders may be more lenient with income verifications and often give you a mortgage based on the property’s location, condition, and value rather than your income. However, you may still need proof of your ability to repay. 

    Generally, private lenders will consider the property value and market to see the resale potential, as they rely on the property as collateral should you default on the payments or terms set in the mortgage contract. They will consider the equity in the property if you are refinancing or the downpayment you have if it’s a new purchase, with some private lenders requiring a higher downpayment.

    Do private mortgage lenders let you borrow more?

    You may be able to borrow more with a private lender. However, this will vary based on the lender’s guidelines for acceptable lending requirements, the subject property’s location and loan-to-value (LTV) ratios.

    What if my private lender goes bankrupt? 

    Your mortgage may be transferred to another financial institution if your lender goes bankrupt. This means you will still be responsible for paying off your mortgage even if your original lender is no longer in business. 

    If your lender goes bankrupt, it must sell its current assets to pay its debts. One such asset is your mortgage. When you borrow money, the debt you owe becomes an asset for the lender, as it expects you to repay the loan with interest over time. If the lender needs to sell its assets, your mortgage debt can be transferred to another company. However, you will still be required to make your mortgage payments to the new owner. 

    If your mortgage is transferred to a new owner, you will receive a notice from them as they are legally required to inform you about any changes to your mortgage. The new firm is obligated to honour the terms of your current mortgage until it is time for you to renew it.

    What is the biggest drawback to receiving a private mortgage?

    The most significant drawbacks to private mortgages are the higher costs associated with these loans and the short duration. Private lenders charge significantly higher interest rates and have additional fees that further increase the cost of borrowing. 

    Most private lenders also offer interest-only loans, meaning you will only pay interest while the principal balance remains untouched during the term. Additionally, with terms as short as 3 months to 1 or 2 years, these mortgages are a temporary solution that requires a sound exit strategy.

    Final Thoughts

    Private lenders in Canada provide an alternative financing solution for borrowers who may not qualify for traditional mortgages. While these loans offer a more specialized approach that can be better tailored to unique properties, situations and borrowing needs, they should be viewed as a short-term solution with a solid exit strategy. 

    It’s advisable to work with reputable private lenders and ensure you fully understand all applicable rates, fees, and mortgage contract terms before committing to this type of financing. Before you look beyond prime lending, contact our mortgage experts and see if there is a solution at nesto for your mortgage strategy.

    How nesto works

    At nesto, all of our commission-free mortgage experts hold concurrent professional designations from one or more provinces. Our clients will receive the best advice and care when they speak with specialists that exceed the industry status quo. 

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    nesto is working hard to change how the mortgage industry functions. We start with honest and transparent advice, followed by our best rates upfront. We can offer you these low rates using the fintech industry’s best-in-class and safest technology to provide a 100% digital online experience and process to reduce overhead costs.

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    nesto is on a mission to offer a positive, empowering and transparent property financing experience, simplified from start to finish.

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