Buying a home is exciting. You get to look for a home that fits your needs, checks your boxes, and suits your lifestyle. Your decision might come down to the neighbourhood, proximity to work or schools, and most certainly, budget. So when it comes to getting a mortgage to fund your new home, what do you do if traditional banks won’t approve you? Many Canadians are turning to private mortgages when the big banks say no. If this includes you, here are a few things you should know about private mortgage lending laws in Canada.
Are Private Mortgage Lenders Legal in Canada?
First of all, we aren’t talking about a shady operation run out of the back of a shop in a sketchy part of town. Private lenders are legitimate investment corporations, groups of investors, or individuals who put up their own capital to offer mortgages. Yes, this is completely legal in Canada. If you are self-employed, new to Canada, or a real estate investor renting out property, you might find that the current mortgage stress test and regulations make getting a mortgage difficult. This is where private lenders step in.
How Does Private Mortgage Lending Work?
Private lenders do not answer to the same regulations as traditional mortgage companies. That means they don’t require you to meet the same standards, making private mortgages more flexible and better suited to less straightforward circumstances. But the requirements will vary from lender to lender. Because they are putting up their own money, each one can set their own application standards to reflect the risk they are willing to take by funding a mortgage.
While private lenders aren’t specifically government regulated, the mortgage broker, who manages the entire transaction and agreement, is. So when you work with a licensed brokerage, you can rest assured that your mortgage is entirely legal. From issuing mortgage documents to instructing lawyers, your broker will guide you through the process.
Rates, Regulations, and Risks
Private mortgage lenders are in the business of lending because they expect to make a return on their investment. Often, they are more interested in how much the home is worth than in your credit score because your home is your security on the loan. That’s why private lending is more attractive for buyers with poor or no credit. But this flexibility does come with a cost. Private mortgages usually have much higher interest rates, as high as 10-18%. And lenders are free to set their own lending fees.
Because of the cost, your mortgage broker will likely only recommend private lending as a temporary measure until you can apply for longer-term financing.
So, are private mortgages riskier than traditional ones? Yes and no. Private lenders aren’t required to hold as much money in reserve for unpaid mortgages, which does make borrowing a risk. But even if your lender goes bankrupt, your mortgage will be sold to a new lender. So you won’t be left without a mortgage. The biggest risk you have to consider is your own ability to pay the mortgage back. Since you don’t have to pass the same stress tests as for a traditional mortgage, more onus is on you to know your own personal financial limits.
Contact a Licensed Broker to Help You Navigate Private Mortgage Lending Laws
If you are wondering if a private mortgage is right for you, make sure to do your homework. Find out what fees, rates, and conditions will apply. Have a real estate lawyer look over all documents. And contact a licensed mortgage broker. We can help you find a lender that fits your needs. Your home-buying experience shouldn’t leave you with unanswered questions.
Reference:
https://wowa.ca/private-mortgage-lender
https://fcnb.ca/en/guides/consider-the-risks-of-private-mortgagesType page body text here...