More than 72% of Canadian mortgages are held by the Big Six banks and so-called A Lenders. However, a growing contingent of B Lenders have come on the scene. These are companies that are using alternative credit models, often leveraging technology to deliver their mortgage products. A third option, also gaining popularity, is private lending.
Private mortgages are a flexible option for people whose credit has been damaged or who do not meet the increasingly stringent criteria set by Canadian banking regulators. Who are these private lenders, and who do they lend to? How do private mortgages work, and how are they arranged? A mortgage broker can answer all of these questions in great detail. In the meantime, here is an overview of private mortgages in Canada.
Investment Clubs, Syndicates and Savvy Investors
Private lenders could be individuals with cash to invest and a desire for better interest rates than they can get from other investments. They may also be a group of individuals, pooling their funds together and investing in ad hoc deals. Or private lenders could be structured mortgage investment corporations consisting of a group of investors who work together to fund multiple mortgages. These companies have their own framework of evaluating criteria.
The term private lender, for some people, brings to mind the image of a loan shark ready to take advantage of the desperate. But the reality is that private lending is much more civilized than that.
Less Stodgy Than the Banks
Banks are highly regulated and must follow stringent guidelines for who they can lend to. You'll need to pass the mortgage stress test (link), have a 'good' or better credit score and meet the criteria for debt service ratios. In addition, you'll need to have a minimum down payment (link) that is not sourced by other credit, and if deemed necessary, purchase mandatory mortgage insurance. On top of all of that, you will need to show the banks proof of your regular income in the form of a letter from your employer or a recent payment record such as a pay stub. Not to worry if you don't have either of those because you are self-employed or own a business. You can show two years of tax records and financial statements instead.
Private lenders don't need you to jump all of those tall hurdles. That's because they're not registered financial institutions. Because they are autonomous, private lenders are more likely to be flexible with their approval criteria. They generally offer shorter-term loans, require that only the interest be paid, and they tend to have faster approval processes.
Flexibility Comes at a Cost
Since private lenders are willing to be more flexible and many cases take on additional risk, their mortgage rates are correspondingly higher. People are sometimes initially stunned at the interest rates offered by lenders for private mortgages and loans, which can be much higher than the rates you see advertised by banks and credit unions. However, 10% or more for a private mortgage may just be the rate you need to pay if you can't get approved by the banks.
An Option When There Are No Other Options
Certainly, no one wants to pay double-digit mortgage rates for a long period of time, but you generally don't have to. Private lending is usually considered a short-term solution used until you can repair your credit, get other debts under control, or get the income verification you need to satisfy B or A lenders and obtain more conventional funding. Private lending is often a good choice for second mortgages to fund renovations or other major expenses.
Whatever your circumstances, you can seek the help of a professional mortgage broker to help you get access to private mortgages, and ensure that your rights are protected. In Niagara Falls, Dave Destefano and the Mortgage Group can help you find the right type of mortgage lending to suit your needs and your plans for the future. Call us, and let's talk!