Earlier this year I was emailing my mortgage broker while I was with my accountant preparing my taxes. I’m self-employed and thought my mortgage was up for renewal so I was obsessed with making sure I could pass the stress test. Turns out my mortgage renews next year. I was so stressed out about it that I started planning a year in advance. (Sorry Sean and Shannon!)
Getting a mortgage is stressful, especially in an environment of high home prices, a tiny rental market, the stress test and articles like this which highlight young people who managed to buy a home. Then you read that Ontario is considering a registry for private mortgage lenders and you’re wondering, “what’s a private mortgage? Would I qualify?”
We’re going to shed light on a dark corner of the market that has been gaining traction in the wake of federally mandated stress tests for uninsured loans. Is a private mortgage right for you? How much interest will you pay and how to avoid predatory lenders when trying to achieve your home ownership dreams.
What is a private mortgage?
A private mortgage is a transaction between a borrower and lender for the purpose of buying a house. Ngoc (Nalie) Nguyen, a mortgage broker with Dash Mortgage in Calgary, says that it’s an option when potential borrowers don’t qualify for a mortgage with A or B lenders (most banks and credit unions fall under this designation). “The stress test has made it more difficult to get a mortgage from a traditional lender,” she says. Dash Mortgage offers a private mortgage option and Nguyen says that the company has seen an uptick in the number of people who are applying for it.
Anyone who’s willing to lend the money and put their name on the deed is considered a private lender
Private mortgages have different criteria than traditional mortgages. The interest rates are usually higher. Current rates with traditional lenders sit below 5%, but private mortgage rates can go up to 20%. Fees can be higher as well, as it’s an unregulated industry, so the broker and lender can set their fee. Amortization can be longer. Traditional terms sit between one and five years but private ones can run for decades, up to 35 years. Finally, in a private mortgage, you only pay the interest, often leaving the principal untouched.
Who might consider a private mortgage?
Anyone can be a private lender. That’s right, anyone who’s willing to lend the money and put their name on the deed is considered a private lender. Private lenders don’t particularly care about your credit rating. They prefer to focus on whether you can pay back the loan, often at a higher-than-market rate and the value of the home. While Nguyen says a private mortgage is a last resort, it can be useful in specific circumstances:
- Self-employed who have an irregular or unsteady income.
- Those who don’t have the best or any credit. This includes non-Canadian residents who don’t have credit history within Canada.
- Emergency funding. Dash says a private mortgage could be a bridging option if you’ve bought a house before selling your previous home.
- Those who have a bankruptcy on their record.
- Small homes that can’t be refinanced. This could include investment properties or tiny homes.
How to treat a private mortgage
“It’s a short-term, not long-term solution,” says Nguyen. “Read the fine print on the contract. Some brokers may take advantage of their clients and charge high fees.” Dash caps broker fees at 5%, but Nguyen says she’s heard of fees much higher, adding up to thousands of dollars. So if you are going to get a private mortgage (Nguyen says try to borrow from your parents first or consider waiting to buy for a year if you can), here’s what to do:
- Get a lawyer who understands and can explain private mortgages.
- Read all the fine print.
- Make sure you understand all the terms and conditions.
- Work with a broker you trust.
- Work with your financial advisor to make sure you can afford a private mortgage.
- Have a financial plan to pay off the private mortgage.
If you have to resort to a private mortgage, Nguyen suggests treating it as a stepping stone to building or rebuilding your credit so you can qualify for a traditional mortgage. Always read the fine print and look at the overall cost. You don’t want to end up owning more than the house is worth.