If you’re in need of a mortgage in Ontario but have been turned down by banks, you’re not necessarily out of luck. Private mortgage lenders in Ontario can offer mortgage solutions for people with bad credit, alternative income sources, or properties on which banks can’t offer loans. Read on to discover whether private mortgage lending may be right for you.
What is a Private Mortgage Lender?
A private mortgage lender is an individual or an organization that has chosen to invest private capital in mortgages or other home equity loans with the goal of making a profit on interest.
There are many different private lenders and lending organizations, but they generally fall into one of three categories.
This category is self-explanatory -- it’s any individual person with enough private capital to invest in mortgage loans. If you get a private mortgage from an individual lender, all the loaned money comes from and is owed back to a single person.
A mortgage syndicate is a small network of private investors who pool their capital to invest in a larger number of mortgages at once. In a syndicate, individual members have a say in which mortgages they want to invest in. When you get a loan from a mortgage syndicate, the money for your loan may come from a few, but not necessarily all, of the investors in the syndicate.
Mortgage Investment Corporations (MICs)
A mortgage investment corporation is a larger, incorporated group of investors pooling their capital to contribute to a large number of investments. Unlike in a syndicate, in an MIC, investors contribute capital to the corporation rather than directly to mortgages, so investors can’t pick and choose which mortgages they invest in. An MIC will use a standardized approval process to determine whether you are eligible for mortgage approval.
An Inside Look At Private Mortgage Lending
Private Mortgage Lenders vs. Banks
The key difference between private mortgage lenders and banks is that banks are federally-regulated financial institutions, and as such have to follow all lending guidelines set out by the government of Canada.
Because of these federal regulations, banks tend to be quite a bit more strict when it comes to who they will and won’t lend money to. Federal and provincial mortgage regulations are in place to help protect vulnerable borrowers from taking on debts that they can’t reasonably afford in their current financial situation. However, due to the across-the-board nature of these regulations, there are many people who could afford a mortgage but who are unable to get approved by a bank, credit union, or trust company due to factors such as unconventional income and bad credit. This is where private lenders come in.
Mortgage Loans from Private Lenders
Private lenders can offer a variety of different types of loans. Private mortgage loans are usually for shorter terms than prime mortgages -- a common timeline for a private mortgage is between 1 and 3 years, whereas a prime mortgage is often set for 25 years or sometimes more. Private mortgages also carry higher interest rates: where a prime mortgage interest rate might go as low as 3 to 5 percent, a private mortgage can carry interest rates of closer to 15 percent.
With a private mortgage loan, you’ll also be liable for certain fees related to legal and brokerage costs.
Private lenders are more flexible than banks in the types of loans they can offer. Reasons for seeking out a private mortgage over a bank mortgage include:
- Purchasing an unconventional property that federally-regulated financial institutions are unable to mortgage (for example, a micro-condo)
- Needing financing faster than would be possible through a bank approval process, or needing only a short term loan
- Having income that is inconsistent or difficult to prove on paper (such as self-employment or small business income)
Private mortgages also come in a variety of types and structures that can be better suited to people with unconventional needs or financial situations. Second mortgages are a common type of private mortgage -- while banks can lend second mortgages, the strict approval process is prohibitive for many borrowers. Second mortgages are useful for refinancing an existing mortgage, or consolidating multiple debts such as student loan and credit card debts.
Bad credit mortgages are another common type of private mortgage loan. These loans are specifically aimed at people who have been unable to be approved for a bank mortgage due to a poor credit rating, often due to previous bad debts that have since been resolved.
Getting a Private Mortgage in Ontario
Since private mortgage lenders are more concerned with the available equity in your home than the specifics of your financial situation and credit history, getting approved for a private mortgage is usually possible as long as you have at least 20 to 25 percent available equity in your home. Equity is any appraised value that does not have debts against it. So, for example, if your home has an appraised value of $1,000,000, and you have an existing mortgage worth $750,000, you have 25 percent available equity in your home.)
You’ll also need proof of income to be approved for a private mortgage. There are plenty of lenders who specialize in poor credit mortgages, but if you can prove that you have average or good credit, you may be able to negotiate a lower interest rate.
If you’re interested in applying for or learning more about a private mortgage, the experienced brokers at Mortgage Broker Store can help you explore options that work with your financial situation, assist you with preparing the documentation needed to secure a loan, and connect you with a reputable lender.