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As it becomes more difficult to secure a mortgage traditionally through a bank, Canadians are turning to the private mortgage option. Increasing more people are using private mortgage brokers to finance homes for various reasons. The high interest rates are putting pressure on homeowners and some people simply aren’t able to get a mortgage at their bank. Private mortgages in dollar value are at $22.4 billion in Ontario alone.
Private mortgages became more popularized in 2021 when the housing market was hot. Canadian home buyers didn’t consider the fact that the prices they qualified for were far less than the bid they were putting on homes. Most of the bids were unconditional so the buyer had to figure out how to get the money they needed in order to close the deal.
This forced many Canadians into private mortgages because they could get approved. Buyers were pressured to get loans that were considered more risky in order to solidify a home, which was out of their budget. Now with interest rates growing, this has made payments unaffordable because ultimately, they couldn’t afford the home or had very little wiggle room.
Private mortgages aren’t necessarily a bad thing as it’s up to every Canadian to decide if they can afford the money they’re being lent. In a situation like what we’ve seen over the past few years, these loans can have an adverse effect. However, when used responsibly when there’s no other option, it can put people into homes they otherwise couldn’t get a loan for.
The Mortgage stress test that was implemented by the Federal Office of the Superintendent of Financial Institutions plays a part in private lending. This requires you to qualify for higher rates in the event that interest rates should increase (as we’ve recently seen happen). This makes it more difficult for Canadians to meet eligibility requirements with traditional lenders. This is a large reason behind why private mortgages are becoming more popular in Canada. The stress test is a certain percentage or 2% higher than your contracted rate. It depends on what amount is higher.
Mainly, Canadians looking for a short-term financing product will be open to getting a private mortgage. They are often people struggling to qualify for a traditional mortgage from a bank, largely due to their income-to-debt ratio. This is when the debt is high compared to how much the person makes. If a person has a low credit rating, banks and lenders will find them to be too much of a risk for a mortgage.
Simply put, it’s just challenging for some people to get approved through lenders like banks. There are other reasons why people may lean towards going with a non-traditional lender. Here are a few reasons:
Whether it’s mortgage or home equity loans, some Canadians simply don’t qualify to get a loan from traditional bankers. There are quite a few reasons this can happen. If you can’t demonstrate a consistent streams of income, have a lot of debt already, or don’t have a good enough credit score, you may not get approval from a traditional lender. This leaves you with the option of a private mortgage where they’re not as strict with as a bank for example.
Some Canadians looking to own a home in Canada may have plenty of money but no credit. It could be that they’re young, successful entrepreneurs or newcomers to Canada. Whatever the case may be, traditional lenders may not lend to someone looking for a mortgage even if they have plenty of money to put down. Private lenders are willing to work with you if your credit is not great or non-existent if you’re able to put down a good amount of money for the down payment.
Unlike traditional lending, a private mortgage isn’t subject to regulations. This allows for more flexibility on loan products and the terms. Private lenders can adjust mortgage interest rates when the mortgage is short-term. Short-term is considered to be two years. There are mortgages of all kinds that a private lender can offer including:
Private lenders often let you borrow more. Banks and traditional lenders will often only give you a loan based on loan-to-value ratio limits. You can borrow up to 80% of the value of your home if you already have one. Private lenders will lend you up to 90% of the value of your home and in some cases even 95%.
Even if you have a great credit score, money to put down on a house, and good income-to-debt ratio, a traditional lender may not agree to loan you money for a private sale. In fact, the majority of policies don’t. If a bank does, they will add a premium on the mortgage, leading to a higher interest rate for private sales. Going through a bank will also require an appraisal in almost every case.
Keep in mind that a private lender should be a last resort and should be a temporary short-term solution. Make sure you can afford the mortgage you’re asking for. Private lenders have a delinquency rate that is often seven times higher than the bank rate. Mortgage rates are usually going to be higher as well than the A and B lenders.
Make sure you read the fine print of your contract and that you understand the terms involved. Do your own due diligence to make sure you can afford monthly payments. A private lender is unregulated and aren’t subject to rules that a bank or traditional lender must work under. That is precisely why it’s so popular but it’s also why you should look into the lender to make sure they’re working for your best interest.
Private lenders don’t have to keep funds in a reserve in the event of credit losses that are connected to mortgage loans. This makes private lenders more susceptible to going under in the event of a massive mortgage default. Make sure the company you’re going to work with is well-established and ask them questions like how they’re protecting you if there are major economic fluctuations.
If you can’t get a mortgage in the traditional way, you may want to consider working with a private lender in good standing. There are situations where you know you can make payments and have the confidence to purchase a home with long-term certainty. If you are considering working with a private lender, make sure it’s for a short time and have a long-term plan. Private lenders often charge a lot more for their services and if you did default, it would be very costly.
Many people have been turning to private mortgages in a desperate manner, which isn’t recommended. If you can’t afford to get a home in the Canadian housing market at the moment, it may be time to reassess instead of desperately seeking out any means you can to get into a mortgage. If you are going to work with a private lender, make sure they’re totally transparent about what you’ll be paying. If they aren’t willing to give you real information on the potential risks, this should be a red flag. Make sure to research the private lender to see if they’re legitimate. If they are, this could be a great opportunity to get your foot into the housing market.
