Prime lending rates have been increasing since the beginning of 2022 in response to the Bank of Canada’s (BoC) attempt to get a handle on inflation. In their July 2023 announcement the BoC raised Canada’s overnight lending rate to 5%, resulting in the 7.2% prime rate currently used by banks. High prime rates mean a greater number of Canadians are ineligible for bank mortgages and will be looking at alternative lenders such as private mortgage lenders to get them through the short-term.
While private mortgage loans are still woven into the country’s financial system, and are therefore indirectly affected by the prime lending rate, their main advantage for struggling Canadians is their flexibility. In fact, their flexibility makes them attractive for a variety of people in different situations that fall outside the bank’s cookie-cutter requirements.
This article will answer some of the questions that surround private mortgages: what are they, who could benefit from them and what their risks are.
What are Private Mortgage Lenders?
Traditional lenders such as banks or credit unions, offer better rates than private lenders, but have very stringent qualifying requirements. Private mortgage lenders, on the other hand, have higher rates and fees and usually a shorter repayment term, but are more flexible with their eligibility requirements. Approval times for private loans are also generally quicker — sometimes as fast as 24 hours in some situations. Private mortgage terms typically range between 1 and 2 years in most cases, and that’s why they’re an excellent short term lending solution.
Private lenders can vary from private individuals to large companies that lend money directly to borrowers. They are not associated with banks or other financial institutions, their fees are not regulated, and they often specialize in the sorts of mortgages that banks won’t touch, such as bad credit mortgages, for example. In British Columbia, if a private lender lends more than ten mortgages in a year, they must be licensed as a mortgage broker.
The four types of private mortgage lenders in Canada are:
Mortgage Investment Corporation (MIC): This is the largest type of private mortgage lender. A MIC gathers funds from investors to provide a variety of mortgages. Investors in MIC’s receive interest income.
Limited Partnership: This is a less common form of private lender than a MIC. Similar to a MIC, funds are gathered from investors, and invested in the limited partnership. The limited partnership funds mortgages from these proceeds, and limited partners earn a return generated from the net income of the limited partnership. While there are fewer restrictions on a limited partnership structure than a MIC, only non registered funds may be invested. B-Smart Home Loans LP is an example of a private lender structured as a limited partnership.
Syndicated Mortgage: These are funded by a group of private individuals and are usually led by licensed brokers.
Individuals who lend their money to another, such as a family member.
Who Could Benefit From a Private Mortgage Loan?
Borrowers who can’t qualify for a bank mortgage, such as the self-employed, those with foreign income or a less-than-stellar credit score, or those who have high debt, might consider a private mortgage lender.
However, difficulty qualifying for a bank mortgage isn’t the only reason to think about private mortgage lenders; in some situations, they may be your go-to choice, especially for:
- People who need a loan fast!
- People who need a loan for bridging two mortgages (when you haven’t yet received payment from selling your old home for the down payment on the new home you’re purchasing).
- People who are buying an unconventional home such as a mobile home or a run-down building with the intention of renovating.
- Real estate investors.
Risks of Borrowing From a Private Mortgage Lender
Private lenders do not have insurance to protect them from borrower default. Because they are taking on more risk than a bank, the rates and fees will be higher — though each lender will have different amounts for the various components of the total cost. For example, their rates may appear very competitive, but the fees will make up for it. Make sure you are aware of all the costs, and when they will be applied.
When you are looking for a private mortgage be sure to ask questions about the term, length, repayment, what happens if you default, and so on. Shop around, and once you choose a lender, examine the documents carefully, and get everything in writing.
There is always the risk, especially if the private lender is experiencing a large number of defaults, that they could go bankrupt, but the likelihood is minimal. In any case, your mortgage would simply be sold to another lender. Nothing would change for you; you would just make your mortgage payments to the new lender.
Because of the high cost, a private mortgage loan is best as a short term loan and you should always have an exit plan or a plan to transition to a lower cost, long term solution.
Is a Private Mortgage Lender Right For You?
As mentioned throughout this article, flexibility is the main advantage of a private mortgage lender. This flexibility gives the private mortgage lender the ability to respond to a variety of unique situations that borrowers find themselves in, and come up with creative lending options. Their flexibility comes from the fact that they aren’t heavily regulated — and while this is good for many people, it also means you’ll need to be on your toes when you are negotiating terms.
Alternatively, you could just go through a mortgage broker, let us do most of the heavy lifting and know that you are in good hands with our many years of experience dealing with private mortgage lenders! Give us a call, and we can discuss whether a private mortgage broker would be a good choice in your situation.