When you should consider a private mortgage in Canada
Private mortgages are an alternative to traditional mortgages offered by major banks and credit unions. They operate just like a regular mortgage, where you make regular monthly payments, but they differ in things like interest rates, term length and eligibility.
What are private mortgages?
Private mortgages are offered by private mortgage lenders. Private lenders can range from specialized corporations and groups of investors to private individuals. Private lenders invest directly into your mortgage by funding it using their own money.
Since private lenders are individuals and non-financial institutions, private mortgage lenders are not required to follow federal mortgage lending regulations. This means that they can offer higher-risk mortgages and structure their mortgages differently.
Private mortgages are usually short-term, ranging from a few months to a few years. The most important thing that private lenders look for is the amount of home equity that you have. Having a home equity of at least 15 per cent of the value of your home can pretty much guarantee approval for a private mortgage, though the mortgage rate that a private lender will charge can be quite high.
When should you consider a private mortgage in Canada?
Homeowners often turn to a private mortgage lender if they are declined for a traditional mortgage at a major bank. Private lenders are much more generous in their lending requirements, however, this extra risk that they take on is compensated in the form of higher mortgage interest rates. That is why private lenders are often considered to be a lender of last resort.
There can be reasons why you were declined by a bank, such as if you are a recent immigrant, if you have a poor credit history, if you are self-employed, or if you have an unstable income source. You might also look to get a private mortgage even if you weren’t denied, but if you wanted a specialized mortgage product. This can be for investors looking to renovate and flip a house in a few years, or for those that are looking for a short-term mortgage.
Private mortgage rates
Private mortgage rates are usually higher than rates from a major bank, and can sometimes be double or triple the rate. You might also encounter additional fees, such as a broker fee or a lenders fee, which can increase the cost of a private mortgage. That is why borrowers usually need to have an exit plan when they apply for a private mortgage, such as being able to transition back to a traditional mortgage at the end of their term after building up their credit score.
Private mortgages are usually interest-only, which means that you only need to make interest payments during your term. Visit Wowa’s updated list of current private mortgage rates to find out their rates, what minimum home equity they require you to have, and the lender fee they charge.
Risks of a private mortgage
Since private lenders are taking on a greater amount of risk, they will be quick to start foreclosure should you miss a mortgage payment. A significant amount of their income is through the fees that they charge, since the interest flows through to their investors instead. This means that renewing a private mortgage might result in the same fees as a new private mortgage, such as for appraisal fees and lending fees.
Private lenders might also require another appraisal when renewing, even if your term was less than a year, since they want to make sure that the value of your home is still in line with what they are comfortable with financing. Borrowers that didn’t have an exit strategy or are unable to fulfil it, such as still having a poor credit score or high debt levels, might find renewing to add on even more costs.
How can I find a private mortgage lender?
Private mortgage lenders are not allowed to advertise to the public in some provinces in Canada. This means that they will need to source borrowers through mortgage brokers instead. Mortgage brokers can help connect you to private lenders and other mortgage lenders, assist you in selecting the right mortgage product for you, and negotiate rates on your behalf. You can find a list of private lenders and mortgage brokers to connect to on Wowa’s website.