Borrowing from a Private Lender
| March 05, 2020
Private lending is becoming increasingly popular among Canadians looking to secure loans to buy, renovate, or refinance a home.
Canada’s current mortgage rules, including the stress test, have made it more difficult for some people to get mortgages from traditional lenders, particularly for those who are self-employed, first-time home buyers, new to Canada, or have credit challenges.
As a result, more buyers are turning to private lenders.
Private lenders include mortgage investment corporations, investors who pool their capital (syndicated mortgages), or individuals lending their own money.
For people unable to secure a traditional mortgage from a bank or credit union, private lenders could offer an alternative. Working with a private lender and fulfilling the terms of the mortgage may even help improve a person’s credit situation.
However, if you are considering using a private lender, there are things you should know:
- property-focused approval—in traditional mortgages, the borrower qualifies first based on their ability to repay the mortgage, then on the value of the property. In private mortgages, often the property qualifies first based on its value and location—the client’s financial situation is secondary
- higher rates—because private lenders are taking on higher risks, they usually charge higher mortgage rates
- additional costs— in addition to higher interest rates, private lenders charge a fee. These lender fees, along with broker commissions, can add up to thousands of dollars on top of administrative and legal fees. However, if you have money to put down up front, you may be able to pay a lower mortgage rate by paying a higher fee. Ask for calculations showing the “effective” rate of different combinations of fees and rates.
- foreclosure—private lenders can be quicker than banks to foreclose on your home if you fall behind on your mortgage payments
- short-term loans—many private lenders typically only offer a loan for a term of a year, or possibly two. Borrowers unable to obtain bank financing at renewal may end up in a cycle of these short-term, higher cost mortgages
- interest-only loans—Some private lenders offer interest-only loans. Unlike standard loans, the monthly payments are applied only to the interest. While interest only loans have lower payments than standard loans, at the end of the loan’s term, the borrower will find themselves no further ahead, with the full balance still outstanding
Regardless of the type of lender you work with, do your homework!
- find out the cost of any finders’ or brokers’ fees, the interest rate, your pre-payment options, and the length of the term
- be sure to ask about renewal options and any fees involved in renewing the mortgage
- consult a real-estate lawyer before signing a contract. Ensure you understand the private lender’s foreclosure process and your rights in case you miss a payment
- if you are working with a mortgage broker who is representing the private lender, make sure you understand the mortgage broker can only provide advice to the private lender—as the lender is their client. If you want to hire a mortgage broker to represent you, they cannot be with the same brokerage as the one representing the private lender
- mortgage brokers must declare any conflicts of interest. They may be lending their own funds or the funds of a family member. They clearly cannot represent your interests and their own
- make sure the mortgage associate or broker is licensed by RECA. Use the Find a Professional tool on reca.ca to verify
- ensure you know the who is managing your mortgage—e.g. who are you making payments to, who is managing other aspects of your mortgage, such as preparing your statements. Be comfortable they are qualified.
You may find that traditional financial institutions and mortgages might not be the right fit for you for whatever reason. Working with a private lender is an available option. Ensure you don’t end up worse off for it. Do your homework. Understand your rights and your responsibilities. Find the best option for you.