A private mortgage is a financing alternative to consider, especially if you are having difficulty securing a mortgage loan elsewhere. We’ll take a look at exactly what a private mortgage is, how you go about obtaining a private mortgage, and how a private mortgage lender differs from other financial institutions and lenders.

What is a Private Mortgage in Ontario

A private mortgage is a lending option in Ontario, and across Canada, for those seeking a mortgage alternative to what are known as A-lenders and B-lender.  The requirements of obtaining a private mortgage are generally less stringent than through the big banks, Credit Unions, and trust companies, which comprise the vast majority of A-lenders in Canada.  

A private mortgage, then, is essentially a type of mortgage loan, sourced from another person, or business, other than a bank or other finance provider.  In Ontario specifically, it means that the lender is not: 

• A schedule I or II bank (A-lender)
• A registered loan or trust company (B-lender)
• An insurance company or one of its subsidiaries
• A Pension fund
• Any other type of firm that lends money as part of its core operations

In terms of classification, private mortgage issuers are known as C-lenders. B-lenders are classified as lending institutions other than the big banks, which include Credit Unions and Trust companies.

When People Turn to Private Mortgage Lenders

Big banks are most often chosen by individuals for their mortgage needs.  There are circumstances, however, when this is simply out of the question.  Generally speaking, a history of bad credit, or inability to prove your income, will eliminate the big banks, and even Credit Unions and Trusts, as a source of a mortgage loan.  They have strict guidelines as to who qualifies for one, and will not cross it.  

Private mortgage lenders will be less strict about whom they lend to, but they do have one crucial requirement they generally use to evaluate you: the equity in your home.

The amount of loan you qualify for through a private lender will be primarily based on what your home is worth and its location.  In very broad terms, they will likely want to see at least $70,000 in equity on your property, in order to consider you for a mortgage. There are various types of private mortgages, and reasons for considering one.  These include:

• High risk mortgages
• 1st mortgage – private
• Bad credit mortgage – commercial
• Private construction financing
• Home equity loan
• Loan for secured renovation
• Financing for vacant land

Despite the various nature of each of these mortgage loan types, a private mortgage provider will still likely place most of your eligibility on the equity of the property you own;  it will be the deciding factor in the vast majority of instances.

There are other various circumstances as to why an individual might want to seek out a private mortgage.  These include:

New Immigrants – coming to Canada often means that an individual’s credit history has to start from scratch – any foreign credit history will likely not be recognized by Canadian credit agencies.  Recent arrivals to Canada may also have a limited employment history in this country.  This too will be less favourably looked upon by a big bank, which in fact, will place stricter requirements on immigrants seeking both mortgages and other types of loans.  For this type of customer, C-lenders present a viable alternative.

Foreign Income – in many instances, foreign income will not be recognized as legitimate by the big banks and trust companies.  If a bank has difficulty verifying a foreign income source, the individual would be disqualified for a mortgage loan through banks and trusts.

Irregular Income or Self-Employed – wide fluctuation in month-to-month income, working on commission or tips – often it is very difficult or impossible for many people with this type of employment to secure a mortgage from an A or B-lender.  Private lenders therefore offer a viable alternative in this situation.

Who Provides Private Mortgages in Ontario

There are different types of private lenders out there.  We’ve seen that A-lenders and B-lenders are more strict about who they qualify for a mortgage.  Private lenders, on the other hand, could be as simple and direct as a family member or friend lending you the money – borrowing money from them for mortgage purposes makes them your private mortgage provider.  

But there are also commercial entities which specialize in this type of lending.  As mentioned, these mortgage service providers are known as C-lenders.  To work with them, you generally need to go through a mortgage broker; they generally will not deal directly with the public.  This requirement is actually beneficial for you as the customer.  Mortgage brokers have the knowledge and all the latest information on the marketplace; they can be an excellent resource for you, in your search for a mortgage loan.

The private lender segment is growing across Canada.  Just a few of the well known or emerging C-lenders out there include:

• Trillium Mortgage
• Sun Mortgage Company
• Calvert Home Mortgage
• Clover Mortgage
• Alpine Credit
• Prudent Financial
• Clifton Capital Corporation Inc.
• Private Lender Inc.

So there are two ends of the private lending spectrum:

• Private individuals whom one might turn to – friend, relative, acquaintance – who might be willing to privately loan funds for a mortgage
• Mortgage Investment Corporations (MIC), such as those companies just listed 

There is one other potential source of private lending: a Syndicated Mortgage. This is a pooled fund of private investors who provide private mortgage funding.  This type of mortgage, like most MICs, is typically done through a mortgage broker, as they are familiar with and connected to what’s available in the syndicated mortgage marketplace.

How Private Mortgage Lenders are Different from A-Lenders and B-Lenders

Flexibility – Private lenders are not subject to the regulations that A and B-lenders must adhere to.  As a result, they are much more flexible, in terms of what they can offer. It’s very important to note that most private mortgages are of a much shorter amortization period – typically under two years.  Therefore they can adjust interest rates much more easily than their A and B counterparts.

Existing home equity – The other major difference, mentioned previously, is that private lenders base your eligibility for a mortgage almost exclusively on the equity you have on your home or property you own.  This is the basis upon which they operate almost exclusively.  So as a prerequisite, when seeking a mortgage from a private lender, you will need to have property with equity built up in it; you will be borrowing against the value of it.  Your private lender may allow you to borrow up to 90% of the equity you have built up on your property.  This, obviously, becomes their collateral in the case of a default.

Interest rates – because they are considered a higher risk loan, private mortgages tend to have significantly higher rates of interest associated with them.  They may also charge extra fees for their services.

Quicker approval process – it is generally much easier and faster to get approved for a private mortgage, with the aforementioned prerequisite – existing home equity.  The turnaround time for approval can be just a few days, versus weeks or longer to get an approval from an A or B-lender.  Some even offer same-day approvals.  Once again, all this needs to be done through a mortgage broker, in the case of MIC and syndicated mortgages.

Summary – Private Mortgage Options in Ontario

Private Mortgages certainly represent an option for someone seeking financing in Ontario and across Canada.  It is, in fact, a growing market.  To be clear however, it should be noted that the vast, vast majority of mortgage lending in this country goes through A and B-lenders – the big banks, and Credit Unions/Trust companies, respectively.  Even with recent growth, private lenders represent only about 1% of the mortgages in Canada.

Keep in mind that the private mortgage option should generally be viewed as a last resort option.  Typically, they are used as a stop-gap measure, under special circumstances, to acquire funding with the intention of paying back the loan in quick fashion.  Interest rates are much higher in this segment of the market. You will be paying considerably more for the faster turnaround, the lower scrutiny level, the convenience, and the added flexibility of a private mortgage.

An important statistic to be aware of is that the delinquency rate for private mortgages is seven times higher than that of the banks.  As a borrower, it is safe to say that you should avoid, in every way possible, falling into default on any kind of loan, including a private mortgage, no matter what the amount and terms.  Your future credit rating and ability to secure financing in the months and years ahead could be severely impacted by such an unfortunate circumstance.

One Final Thought – Private Lender Bankruptcy

Your private lender, through an MIC or via a syndicate mortgage, may face a higher potential for bankruptcy themselves, due to the fact that they are highly unregulated, and not subject to the rules A and B-lenders face; specifically, for keeping adequate funds in reserve in the case of losses from mortgage loans.  If for some reason a rash of defaults hit your lender, they could go under, leaving your loan with them up in the air, but certainly not forgiven.

In the event your lender goes broke themselves, your mortgage loan through them will be sold to another lender.  You are not off the hook for the funds borrowed from them.  It may include another round of complication and expense for you as the borrower.

This last point becomes a fitting illustration of the realities of borrowing through a private mortgage lender.  While it is a viable source of funds when all other options are exhausted –  both MICs and mortgage syndicates are well established in Ontario and across the country – they still bring with them a level of risk, expense, and potential volatility that the consumer needs to be well aware of, in advance.  Whatever your circumstances are, the best pieces of advice when seeking out any type of loan are: 1) proceed with caution and 2) be an informed consumer.

If you’re ready to learn more about mortgage options, contact us today!

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