There are five big banks in Canada, known as The Big Five, six if you count the National Bank of Canada. These Big Five hold the majority of assets in our country. So it’s no surprise that they also carry most of our mortgages. But they are not your only option for financing your home.
Many Canadians are finding that they no longer qualify for a new mortgage or for refinancing with their previous lender. There are many reasons for this, but the good news is your mortgage broker can bring you alternative options, like private mortgage lending.
What is a private mortgage lender?
A private mortgage lender is an investment corporation, small business, or individual that offers their own money for mortgages. Key terms and conditions are very similar to a regular mortgage, but usually with shorter terms (one to three years). Private lenders often use different criteria to qualify people for mortgages, which makes them a viable option when the big banks turn you down.
Who can, and should, apply for a private mortgage?
Several circumstances might lead you to apply for a private mortgage over one with a big bank. Usually, these revolve around not qualifying for a regular mortgage.
Are you living beyond your means so that your debt load is too high to qualify under tighter restrictions? As of June 1, 2021, changes to Canada’s mortgage stress test made it harder for many Canadians to qualify for a mortgage as debt continues to rise.
Do you want to renew your current mortgage while adding to it so you can upgrade or expand your home? If the housing market is making it impossible to buy a bigger home to fit your growing family, renovations may be the best way to go. But you may also struggle to renew a mortgage with additional financing.
Are you a real estate investor with rental property mortgages up for renewal? Because of tightening restrictions, your current lender might not approve your renewal, leaving you little option but to look for a private lender.
Private mortgage lending might be your saving grace in these situations. So what do you need to know before you jump into a private mortgage?
3 Things You Need to Know
Private lenders usually have higher interest rates than big banks.
If you’re familiar with interest rates from any of the big banks, private lending can come with some serious sticker shock. The convenience of qualifying under different requirements does come with a steeper price tag. Understand that you might be paying upwards of 10 to 18% for your mortgage. Private lenders are taking on a much higher risk and the cost reflects that.
Also, be sure you ask your broker to walk through the fees with you. Private lenders may have fees and charges that are different from those of a regular bank. Knowing your numbers upfront will save you a lot of headache and stress later on.
Make sure you ask the right questions.
In addition to asking about interest rates and fees, you need to know what your payment options and risks are. Are you able to make lump sum payments? Is there a penalty for early repayment?
Do your homework – your mortgage broker can help with this – to make sure the private lending firm or individual is legitimate. Do they have a history of successful and honest lending practices? How well-funded are they? Without the same backing as the big banks, it’s important to know your lender isn’t going to run out of funds.
A mortgage broker can help you find the option that’s right for you.
Brokers don’t work for a particular bank or lender. Your mortgage broker looks at all the options available and finds the best solution for your particular situation. If you don’t qualify for a traditional mortgage, whatever the reason, they can help you look at other options. If a private mortgage lender is what you need, your broker can help you find the right one. Contact me today and we can talk about your mortgage needs.
Resources:
https://www.investopedia.com/terms/b/bigfivebanks.asp
https://www.ratehub.ca/blog/whats-the-difference-between-a-lenders-and-private-mortgage-lenders-in-canada/
https://globalnews.ca/news/4616394/private-mortgage-lenders/