There’s been a lot of upheaval in Ontario and the rest of Canada recently, concerning the real estate market and lending rates.  Pre-pandemic, we saw a relentless charge upward in home resale prices, as well as new construction housing prices, while interest rates remained low and highly attractive.  Covid 19, which hit the entire economy like a ton of bricks in early 2020, threw a curve ball into the real estate market – the reverberations are still being felt as we head into the fall of this year.  That doesn’t mean, however, that the action has dried up – quite the opposite.

Despite the trying times, families and individuals have continued their quest of buying a house or condo, as either a long-term investment, or an improvement in their living situation.  Unless they have buckets of cash tucked away in some (large) space, chances are a mortgage will be required to finance a home purchase.  This is nothing new – it’s been going on for decades and decades – even centuries – in this province, across the country and around the world.  What is evolving is the range of lending options out there, as house prices have climbed, as the economy has shifted, and as lending rates and mortgage ratios have risen.

Here’s a look at one specific approach some are considering for the financing of their home purchase – the private mortgage.  Let’s dig deeper into this option for Ontario home buyers, 

real estate investors, and even those who may be considering a major home renovation requiring a loan. Read on.

Where Private Mortgages Fit into the Lending Picture

The lending spectrum is divided into three main sectors, which include:

• A-lenders – these are the major banks. They set the highest standard and requirements for obtaining a mortgage loan.  The mortgage stress testing they will put a potential borrower through is the most stringent of the three types of lender.
• B-lenders – trust companies and Credit Unions make up the bulk of this segment.  Their requirement for borrowers seeking a mortgage is not as stringent, although they will still perform a fairly thorough evaluation of your financial standing, particularly when it comes to your ability to demonstrate a stable household income.
• C-lenders – private lenders.  These firms and individuals with have the least stringent requirements for you to get your mortgage – but there are important things you should be aware of when considering going this route

Let’s take a more detailed look at this last segment of the lending landscape in Ontario – private or C-lenders.

The Private Mortgage Option when You Are Seeking a Loan

You may have already found yourself in a position that you see a private mortgage as a solution:

• Buying your first house
• Consolidating a bunch of debt into one payment
• Been turned down by A and B lending institutions
• Some combination of the above

Private mortgages do offer a viable alternative in all of these situations, but you should go into such an agreement only after getting familiar with what they entail, and how they differ from a loan you get from a bank, trust company or Credit Union.

Generally speaking, people turn to private lenders once they’ve exhausted all other options in obtaining a loan or mortgage.  We’ve already mentioned that the big banks and even the trust companies have fairly stringent requirements before they approve a large loan.  Everyone has unique financial circumstances; several common contributing factors that make a private mortgage an attractive or necessary option include:

• The shorter turnaround time or approval period – often as little as five days.
• Shorter term financing options – most private lenders can offer mortgages with amortization periods as low as one to three years.
• Less strict criteria for applicants – many private lenders will overlook your past credit issues.
• Using your existing home as leverage against the loan.

This last point is a critical one.  A majority of borrowers going the private mortgage route already have a home. The private lender will consider your existing home equity as a major part of their evaluation of your creditworthiness.  To be perfectly blunt, this is for their own protection in the case of a default – you will have to sign off on the fact that they recoup their funds through that equity, should things go awry with your payments.

Private Mortgage Approval Process – the Loan to Value Calculation

The amount of money you qualify for your mortgage loan through a private lender is largely calculated by the Loan to Value (LTV) you possess in your home.  Most private lenders are looking for an LTV of 75% or greater – 80% is frequently used.  That means if, for example, you are seeking a loan of $160,000, on a property valued at $200,000, you would need to have a down payment amount of at least $40,000 to be approved.  It’s a simple calculation:

The loan is $160,000

The value is $200,000

In this instance, you would make the numbers work with your down payment amount of $40,000.

What Else is there to Know About the Private Mortgage Lending Process?

It’s important to know that private lending is regulated – by the terms of the Ontario Mortgage Act.  All types of lending in this province fall under this set of rules.  This means that you have some protection under the law when dealing with a legitimate private lender.

In terms of licensing requirements, if you are considering borrowing from an individual – versus a private lending firm – that individual does not need to have a licence as a private lender.  Keep in mind, however, that almost all private lenders are sought out through mortgage brokers, who must be licensed in order to operate legally in Ontario.

The Role of the Mortgage Broker

Mortgage brokers play an important role when you are considering a private mortgage. They are the de facto intermediary between you and the network private lenders in the market. The majority of private mortgage lenders out there will be reluctant to work with you directly – although there are some that operate as both brokers and lenders; most private lenders, however, rely on the mortgage broker to bring them clientele.  

The reason is fairly simple:  The mortgage broker does the up front screening for them. It’s the mortgage broker who will sit down with you first, to determine the specifics of your situation, whether going with a private mortgage is an appropriate step, and whether you qualify for a private mortgage.

Mortgage brokers can also be a good resource for you as an aspiring borrower.  They can handle the legwork of finding an appropriate lender for your specific needs.  They are also very up-to-date on the lending market, the trends, the deals, and everything else related to mortgages in our province.

All mortgage brokers are regulated, so you have the peace of mind of relying on their judgement to help secure you a private mortgage that is 100% above board.

Private Mortgage Lenders’ Rates and Fees

Seeking out a private mortgage is a sensible idea if you have a poor credit score or credit history, and have been turned down by the big banks, trust companies and Credit Unions.  Once you have supplied your personal financial scenario to the mortgage broker, they will help find an appropriate lender based on what you qualify for.

One of the realities you have to be prepared for with a private mortgage is that the interest rate will be higher than those offered by A and B lenders.  Be prepared for rates in the range of 7% to 12%, although of late there have been changes in the marketplace.  Your mortgage broker will be able to advise on the latest trends on lending rates across the board.  The reason you pay more in interest for a private mortgage is because they are willing to take on the risk other lending institutions are not.

Likewise, fees from a private mortgage lender will likely be higher than banks, trusts, and Credit Unions.  Expect to pay in the range of 3 percent up to 6 percent of the loan total for their administrative fees and expenses.

Private Mortgage Lenders are a Safe Option in Ontario

Unless you are considering some really shady and highly risky approach, you can be confident of your private mortgage lender, and their processes and administration of your loan through them, in the province of Ontario.  We’ve listed all the reasons above.  The whole process is regulated by the province; the mortgage broker, as your intermediary, and the lender’s, is also a licensed entity.  It is definitely a viable option, particularly when all your other options have been exhausted, or you have a special financial circumstance.

That said, a great piece of advice is to have a lawyer look over all the paperwork associated with your private mortgage before you sign anything.  Pick a law firm which is very familiar or specializes in finance, loans, and mortgages.  They will be able to go through all contracts and documentation, and advise you on any recommended changes or alterations to the proposed deal.  

One final thought to keep in mind – a private mortgage represents a significant risk to both the lender and the borrower.  You are entering into an area, when considering this type of loan, which other types of lending institutions – specifically A and B type banks, trusts and Credit Unions – do not get into, for just that reason – they are riskier.  The best approach is to assess your financial situation thoroughly long before you contact a mortgage broker.  Figure out for yourself, well in advance, exactly what you can afford, and that you can keep the payments up for the duration of the loan.  The very last thing you want is a default on your hands. Most private lenders do not need income verification.

We hope you’ve found this summary on private mortgages in Ontario interesting and informative. We can fund your deal within 72 hours – for more details on getting a private mortgage, consider contacting us today.

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