What You Will Learn About Private Mortgages
- What a Private Mortgage is
- The Differences Between Private and Traditional Mortgages
- How Private Mortgages Work in Canada
- The Main Benefits of Private Mortgages
- The Main DrawBacks of Private Mortgages
- Private Mortgage Lender Interest Rates and Fees
- How to Get Lower Private Mortgage Interest Rates and Fees
- Should I Wait Until I Qualify for a Traditional Mortgage?
- Why Should You Work With A Mortgage Broker To Get A Private Mortgage?
- Finding Professional Private Mortgage Lenders in Ontario
- Private Mortgage FAQs
Private Mortgages in Canada
Owning a home is an easy way to build wealth in Canada, the hard part is figuring out how you will be able to afford it. You might think of getting a loan from a bank, but that’s often easier said than done. Banks and other financial institutions have strict requirements that disqualify most people from getting mortgages with them. If you have a low credit score or a small down payment, you will not be approved for a mortgage from a bank, but you are not completely out of options, you can take advantage of private mortgage lenders in Ontario to purchase a home with a private mortgage.
By using a private mortgage, you can bypass banks and other traditional lenders to get the home you want, when you want it. Instead of wasting time and effort trying to gather a larger down payment or improve your credit score, you can take immediate action when you get a private mortgage. Keep reading to find everything you need to know about private mortgages in Canada and if working with private lenders is right for you.
What is a Private Mortgage?
A private mortgage is a loan offered to borrowers looking to purchase property that is provided by a private lender. Private lenders are individuals or business that lend money to borrowers. Just like with any lender, you will need to pay back all that you borrowed, and with interest to your lender.
Private lenders are not limited to mortgages, they can provide financing for a wide range of uses from renovations to debt consolidation loans. They are often sought out by individuals who have been denied mortgages or other loans by banks.
What are the Differences Between Private and Traditional Mortgages?
Large banking institutions in Canada have federal regulations that make it difficult for some Canadians to secure mortgages. Since private mortgage lenders do not fall under the same regulations, their financing options are available to help Canadians who could not qualify for loans from major banking firms.
The main differences between a private mortgage and a traditional one are:
- The down payment on a private mortgage can be much lower.
- Your credit score is not a factor when it comes to securing a private mortgage, it will only impact your interest rate, with the lower the credit score the higher the interest rate you will receive. Private mortgage lenders will often work with those who have bad credit to help them purchase homes through private mortgages.
- Private mortgages allow you to make interest-only payments each month. You don’t need to make payments on the principal loan amount until the end of the mortgage term. Banks will require you to pay interest and principal each month in order to keep your mortgage in good standing.
- Private mortgages often come with higher interest rates than mortgages from banks, however, how much higher will depend on your financial situation as a borrower.
- They can also provide loan terms as short as a year or two as opposed to the typical 5 to 30-year mortgage terms from banks. You can still opt for a longer mortgage term but if a short-term is best for you, a private mortgage can offer you this.
- Since private mortgages have far fewer requirements, they require significantly less documentation from the borrower than banks do.
- Private mortgages and all private loans can be processed much faster than those from financial institutions, getting borrowers cash within a week from the day the loan agreement has been signed by both parties. For comparison, a bank will usually take a few weeks or a month to give you the funds.
How Private Mortgages Work in Canada
Find Private Mortgage Lenders
If you want to get a private mortgage, you will first need to find private mortgage lenders so you can explore your options and determine what kind of interest rate you will be charged. Private lenders can be hard to find so the best way to find and communicate with them is through a mortgage broker.
Compare and Contrast Private Mortgage Rates
If you have a reliable mortgage broker like Second Mortgage Canada, they will be able o find several private lenders in your area in a matter of days. When comparing different lenders for your mortgage, take note of the interest rates being offered, the loan terms, as well as any fees and stipulations that each lender may have. Typically the larger the down payment you can provide and the better your credit score the lower your interest rate will be. Most private lenders will require a down payment of at least 15 percent of the property’s value before approving a private mortgage but this can change with each lender you speak with.
If you are purchasing a home with a down payment under 20 percent, the private lender may ask you to get private mortgage insurance. Just like regular mortgage insurance, this will ensure your lender gets fully paid in the event that you default on your loan. Private mortgage insurance usually costs between 0.5 and 1 percent of the mortgage annually and can be paid in monthly installments.
If you already own a home, they will need to appraise it first and look at any debts attached to the property before they can determine what kind of mortgage and interest rate you are eligible for.
Sign Your Mortgage Agreement
Once you find a private lender that works for you, reach out to them and confirm your interest in working with them. They will send you a mortgage agreement document that will outline the terms and conditions of the mortgage. During this phase, you should carefully look over all the details and ask your lawyer to do so as well.
Ensure You Can Afford the Monthly Payments
Once you sign and send the mortgage agreement back to the lender, they will send you the funds so you can buy the home. Just like any other mortgage, every month you will have to make payments on this mortgage until it is paid off or the mortgage term ends. You won’t need to make any payments on the principal amount until the mortgage term ends. If you fail to make payments on a private mortgage, your mortgage will go into default.
When the mortgage term ends you can choose to renew it with your current lender, refinance it, or renew it with a different lender offering a better deal. As you can see, a private mortgage works just like a traditional mortgage, only it allows more borrowers to qualify for mortgages in exchange for a higher interest rate.
If you are looking to buy a home, but are not sure what kind of mortgage you will need to purchase it, use the mortgage calculator below to determine what your monthly payments will be so you can determine if the expense is feasible in the long term.
Why is Private Mortgage Lending Becoming More Popular in Ontario?
A mortgage stress test was introduced in the early 2010s to ensure that borrowers were able to meet certain federal guidelines. While the stress test was designed to determine if a borrower was able to obtain an affordable home loan, the qualifying standards were adopted by the biggest financial institutions which made it more difficult for Canadians to secure a mortgage loan with a federally regulated lender.
Individuals who do not meet the qualifying standards for local banks may still dream of homeownership. After all, owning a home has a variety of benefits from building wealth to creating a safe palace to raise a family.
As the cost of living has been steadily increasing, the requirements banks and other financial institutions set to approve mortgage applications have only been getting more stringent. This has led to more Canadians pursuing alternative methods to raise the money needed to buy homes, including getting private mortgages. In 2018, the number of Canadians using private mortgages doubled from 2015, and the trend has only continued since.
Private mortgages have much lower requirements and faster funding time frames than traditional home lenders. The extra flexibility and closing speed are some of the reasons that private mortgage loans are becoming more popular across Canada.
The Main Benefits of Private Mortgage Lending
Private mortgages have a unique set of benefits that may be more important to some borrowers than others depending on their circumstances and current finances. Here are the main scenarios where private mortgages are a great option to explore:
The Main Drawbacks of Private Loan Mortgages
While private mortgages can help borrowers get the financing they need to purchase their dream home, they come with some drawbacks compared to traditional mortgages:
- Higher interest rates than banks and other financial institutions
- Difficult to find and compare private lenders with a mortgage broker
- Some private lenders charge administration fees to create the mortgage
Private Mortgage Interest Rates and Fees
Generally speaking – unless the private lender is a friend of a family member – private lenders do charge somewhat higher interest rates than traditional lenders. The costs are above average because private mortgage borrowers are considered riskier than those who qualify for a traditional mortgage.
Here is a breakdown of the average interest rates private mortgage lenders will charge, note that the lower your credit score and down payment, the higher the rate you will likely be charged.
Average Private Mortgage Rates in Ontario, Canada:
- 1st Mortgage Interest Rates: 3.99% - 7.99%
- 2nd Mortgages Interest Rates: 6.99% - 10.99%
- 3rd Mortgages Interest Rates: 9.99% - 12.99%
As you can see, most private mortgage interest rates will come with an interest rate of around 4-10 percent. You also expect to pay an administration fee when your private lender sets up the mortgage. This will usually be worth 2-3 percent of the value of your mortgage.
Nevertheless, if getting a private mortgage is what it takes for you to finally become a homeowner, or to get the financing you require, then it is usually worth it.
Due to the COVID-19 pandemic, the Bank of Canada drastically lowered interest rates across Canada for all lending institutions, and private lenders have largely followed suit. These low-interest rates are not expected to rise anytime soon. Due to this development, you have a better chance of getting lower interest rates with private lenders than ever before.
It is also important to note that some private lenders will charge fees to administer the mortgage application. These fees can be 2-3 percent of the value of the mortgage. Usually the lower your down payment and/or credit score, the higher the fees charged.
How to Get Lower Private Mortgage Interest Rates and Fees
Increase Your Down Payment
Increasing your down payment is an easy way to lower the interest rate and any fees you would be charged on your private mortgage, but not everyone will have the funds available to do so.
Improve Your Credit Score
While your credit score does not determine if you will be approved for a private mortgage, it has a big impact on the fees and interest rate you are charged. After all, the lower your credit score, the more risky a borrower you appear to be. You don’t need to make a big change in your score, even incremental improvements can save you hundreds.
Start by making sure you pay all your current bills on time. Even late payments hurt your score. Going forward, try to not use more than a third of your available credit, as this shows that you are able to control your spending and plan ahead.
Another good idea is to check your credit score and report any errors, Your credit score is catalogued at a credit bureau. In Canada, the two main credit bureaus are Equifax and TransUnion. You can visit them online and check your credit score and history, Take a close look at your expenses and flag anything that looks off. A mistake could be holding your score down.
Should I Wait Until I Can Qualify For A Traditional Mortgage?
That is up to you, but house prices have been rising rapidly over the past few years and they could continue to climb. When adjusted for inflation, over the past 10 years the average price of a home in Canada has risen by nearly 60 percent. With a growing demand for housing coming from millennials and Gen-Z cohorts and a consistently low supply of new-builds, home prices are likely to continue to rise in the province.
If you have almost saved up enough money for the required down payment for banks, and your credit score is nearly at the required amount, waiting a little longer to save up more money and increase your score is not a bad idea. The main drawback to waiting is that if you have a particular home that you want to move in, it may be off the market by the time you can qualify for a traditional mortgage. Given the high demand for homes across the country, waiting may cause you to lose out on your dream home.
You may end up paying a little more from higher interest rates with a private mortgage, but the price of your new home will likely be much higher if you continue to wait until you can save up a larger down payment.
If the decision is between getting a private mortgage now or waiting until you can qualify for a traditional mortgage to purchase a home, you may find that getting a private mortgage now is a much more affordable option in the long term.
It is also important to remember that just because you are getting a private mortgage now, doesn’t mean that you can’t switch to a traditional mortgage at a later time. If you are getting a private mortgage because of bad credit history, or because you are self-employed with a business that is just getting off the ground, you can use your private mortgage to build up your credit or to strengthen your business. Also, at the end of your loan term, you may actually qualify for a traditional mortgage.
Why Should You Work With A Mortgage Broker To Get A Private Mortgage?
It is possible to get a private mortgage on your own, however, this is not an advisable course of action. Private lenders can be quite tricky to find since they hardly advertise or promote themselves to the general public. When looking for a private lender to work with, you want to be able to explore your options to find the best deal you can get, which can be hard when you are looking on your own. A professional mortgage broker in Ontario like Second Mortgage Canada can use their extensive network of private lenders to evaluate your options and negotiate with lenders on your behalf to get the most advantageous deal available.
We can shop around on your behalf to help you find the best possible interest rate for a private mortgage. When a mortgage broker compares rates on your behalf, a single credit check may be used to shop among multiple lenders. This is important because multiple credit checks can temporarily damage your credit, which might make it more difficult for you to get a mortgage.
To save time and effort, many private lenders in Ontario will work exclusively with mortgage brokers like Second Mortgage Canada. This way they know that they are only working with qualified borrowers who are genuinely interested in finding a lender to help achieve their goals. When working with a mortgage broker, you have more opportunities to reach private lenders who provide funding for unique scenarios.
Additionally, working with a mortgage broker is like having a coach on your side. They understand the products and after assessing your situation, they can recommend the right products for you. They will also help you with all of the paperwork and answer any questions that you may have so that you can feel confident about the private lending process.
Experienced mortgage brokers like those at Second Mortgage Canada can easily guide you to the right private lender while answering all your questions and keeping you informed throughout the entire process. We have private lenders from all over Ontario so, regardless of whether you live in Windsor or Toronto in the south, Sudbury or Thunder Bay in the north, we can connect you with private lenders in your area to find the best private mortgage for you.
Finding Professional Private Mortgage Lenders in Ontario
Housing in Canada can is quite expensive for most people, and nowhere more so than in Ontario. The Ontario Real Estate Board has reported that from November 2020 to November 2021, the average price of a home in Ontario grew by 15 percent. With strong immigration, many of the top universities in the country, and the country’s financial capital, home prices in Ontario are poised to continue to grow.
While this is great for existing homeowners, it means you have to act fast before the prices grow out of our reach. Owning a home is likely the biggest financial investment most people will ever make. By owning a home, not only do you have a place to call your own and start a family, but you also have an asset that will grow in value, and can provide you with financing options in the future if you find yourself in need of lots of cash.
In Ontario, borrowers have options to secure the financing needed to own a home. Even if you have a poor credit score or low down payment, you can own a home in Ontario by getting a private mortgage.
Private lending may be more helpful than traditional mortgage loans depending on your financial situation. Without having to follow the same lending rules, private lenders can offer special loan terms that could help you achieve your financial goals more effectively.
When it comes to borrowing money, everyone has different needs that will require a unique solution. Owning a home provides you with financial stability. If you are interested in getting a private mortgage in Ontario or learning more about how the process work, contact Second Mortgage Canada for a free consultation by calling us at 647-927-7836 or by filling out the form on this website. We can explore your options, find reputable private lenders from across Ontario, and negotiate with them to get you the best deal possible. By working with us, you can get the information you need to make an informed decision.
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Private Mortgage FAQs
A private mortgage is a loan provided by a private individual or business that is used to purchase property
If you have a down payment of under 20 percent your private lender may request that you get private mortgage insurance
Private Mortgage Insurance (PMI) covers the lender in case the borrower defaults on their loan
This is up to the discretion of each private lender but usually they require a down payment of at least 15 percent to approve of your private mortgage
The best way to find private mortgage lenders is by contacting a mortgage broker and working with them to help you find the best one according to your needs