Private Mortgage Lenders: Pros, Cons, Risks and Benefits
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If traditional lenders have denied your mortgage application, don’t scrap your dream of homeownership just yet. There are some private mortgage lenders that could support your vision and fill the gap when it comes to providing the money to buy a property.
Although private lending isn’t an ideal first choice for aspiring homeowners, it’s sometimes the only solution available for some buyers. In this article, we’ll examine the pros, cons, risks and benefits of contracting a private mortgage.
- Private mortgages are a potential alternative for those unable to qualify for a traditional mortgage from a regulated lending institution.
- Private mortgage lenders have higher mortgage rates, limited regulations, and higher fees and conditions compared to traditional A lenders or even B lenders.
- Carefully weigh the pros and cons of working with private mortgage lenders and have a solid plan to pay off the loan in a timely manner to avoid defaulting and risking the loss of your property.
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What are Private Mortgage Lenders?
Private mortgage lenders are private companies or individuals lending their own money to their clients. Private lenders are an alternative source of funding usually for borrowers who cannot get traditional loans. This may be due to a poor credit score, irregular income, or difficulty providing proof of income through traditional documentation.
Private mortgage lenders tend to offer shorter-term loans with higher interest rates and fees compared to traditional banks. Still, they may also be more flexible with their lending criteria and able to provide customized solutions to meet the specific needs of borrowers.
List of Private Mortgage Lenders in Canada
As we saw, private mortgage lenders can offer an alternative financing option for those unable to secure a traditional mortgage from a bank. When considering a private mortgage lender, borrowers should pay particular attention to interest rates, fees, maximum loan-to-value ratio (LTV), policies around interest-only payments and minimum credit score requirements to find the best deal.It’s crucial to carefully consider the terms of any private mortgage loan and compare options from multiple lenders before making a decision. Additionally, borrowers should have a plan for how they will repay the loan in full, as private mortgages in Canada often come with shorter repayment periods and higher monthly payments than traditional mortgages.
Here’s a list of private lenders in Ontario and the rest of the country.
|Private Mortgage Lenders||Areas Served||Interest Rates||Maximum LTV||Interest-Only Payments||No Minimum Credit Score|
|Alpine Credits||British Columbia, Alberta, Ontario||Varies||75%||✔️||✔️|
|Nuborrow||Ontario, British Columbia||Varies||80%||❌||❌|
|Prudent Financial||Ontario||10% – 19%||50%||❌||✔️|
|Calvert Home Mortgage||Ontario, Alberta||8.49% – 16.49%||80%||✔️||✔️|
|Guardian Financing||Montreal||11% – 15%||75%||✔️||❌|
|Sun Mortgage||Manitoba, Saskatchewan||Varies||75%||❌||✔️|
|Craigburn Capital||Ontario, Québec, Maritimes||Varies||80%||✔️||✔️|
|Private Lender Inc.||All Provinces||6.99%+||75%||❌||
Who Should Consider Opting for a Private Mortgage Lender?
Private lenders for mortgages may be a good option for those unable to secure a traditional mortgage due to various reasons such as:
Poor credit score: Private lenders may be more flexible than traditional lenders and be willing to work with borrowers who have a lower credit score or a history of missed payments.
Self-employed or have irregular income: Private lenders may be more understanding of those who are self-employed or have irregular income, as their screening uses other criteria such as the potential value of the property.
Need fast financing: you’ll get the funds very quickly after applying for a private lender mortgage which can be helpful in urgent situations or if you need to get the funds very quickly.
Looking for a short-term loan: Private mortgage lenders often offer short repayment periods making them a good option for those who need a short-term loan as they are waiting for other funds to come in such as a bonus, an inheritance or the proceeds of a house flip.
Pros of Choosing a Private Mortgage Lender
Private mortgage lenders are not the ideal option for everyone, however, there are some potential benefits to consider.
Qualifying criteria: If you have poor credit scores or have been rejected by traditional lenders due to other factors, such as being self-employed or a new immigrant in Canada, a private mortgage lender may be willing to work with you and offer more flexible lending criteria.
Fast approval process: Private mortgage lenders in Canada may be able to provide faster turnaround times and more personalized service compared to larger financial institutions.
Cons of Choosing a Private Mortgage Lender
While private mortgages can be a viable option for some borrowers, there are many potential drawbacks to consider. These include:
Lack of regulation: Private mortgage lenders are not federally regulated, which means that borrowers have no protection when getting a private mortgage in Canada.
Additional fees: Private lenders may charge additional fees, such as brokerage fees, and legal and appraisal fees, which can add to the overall cost of the loan.
Very short term: A typical mortgage amortization period is 25 to 30 years whereas the amortization period for private mortgages is more likely to be 3 to 5 years.
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.
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Private Mortgage Lenders vs. A Lenders
Private mortgage lenders and A lenders (traditional banks, credit unions, and other financial institutions) differ in several ways.
A lenders typically have stricter qualification criteria, including a minimum credit score requirement and steady income history, while private lenders may be more flexible in their requirements, allowing for lower credit scores, self-employment income, or other non-traditional income sources.
A lenders generally offer lower mortgage rates than private lenders due to their access to bigger pools of money and economies of scale.
Private lenders often charge higher fees, including appraisal fees, legal fees, and other closing costs, and may require tougher conditions, such as shorter repayment terms, higher down payments, or more frequent payments.
Private mortgage lenders are not subject to strict regulation unlike A lenders, providing borrowers with less protection and transparency.
Private Mortgage Lenders vs B Lenders
Private mortgage lenders and B lenders (such as Mortgage Finance Companies (MFCs)) are both alternative sources of financing for borrowers who do not qualify for traditional A lender mortgages. However, there are some differences between the two:
B lenders are considered to be less risky because they are considered quasi-regulated and have stricter lending guidelines than private mortgage lenders.
While the interest rates for B lender mortgages are higher than those offered by A lenders, they are generally lower than those offered by private mortgage lenders.
Private mortgage lenders typically charge higher fees than B lenders..
Private mortgage lenders are more likely to provide financing with a higher loan-to-value ratio than B lenders.
Here are some frequently asked questions about private mortgage lenders in Canada.
Do private mortgage lenders let you borrow more?
Yes, it’s possible that some private mortgage lenders may allow homebuyers to borrow more than traditional lenders, but this can vary depending on the lender and the specific situation of the borrower. Their maximum loan-to-value ratio (LTV) can be higher than traditional banks.
What if my private lender goes bankrupt?
If your private mortgage lender goes bankrupt, the first thing you should do is seek legal advice to understand your rights and options. In many cases, your mortgage loan will be sold to another lender, but your mortgage terms could change with the new lender, such as the interest rate, payment schedule, or repayment terms.
What is the biggest drawback to receiving a private mortgage?
The biggest inconvenience to getting a private mortgage is the much higher interest rates you’ll get. Private lenders take on a higher risk by providing loans to people with low credit scores or irregular income. This higher risk is reflected in the interest rates charged, which can be much higher than what you would receive from a bank.
In summary, traditional lenders are more suitable for borrowers with stronger credit and financial profiles, while private lenders are a better option for borrowers with lower credit scores or unique financial circumstances, but at a higher cost.
To gain more knowledge on obtaining a mortgage in Canada, get in touch with one of our mortgage experts today.
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