Mortgage Blog

Canada's Mortgage Experts

When to Consider a Private Mortgage: A Guide for Canadian Homebuyers

May 23, 2024 | Posted by: Shannon Mayhew

Navigating the world of Canadian mortgages can be scary, especially when traditional lenders, like banks and credit unions, close their doors. This is where private mortgages come into play. For many Canadians, private mortgages offer a viable alternative to secure financing for their home purchase or refinance needs. But when is it the right time to consider a private mortgage? In this article, we'll explore the ins and outs of private mortgages in Canada, the scenarios in which they make sense, and the potential benefits and risks involved.

Understanding Private Mortgages

A private mortgage is a loan secured through a private lender rather than a traditional financial institution you might be used to. These lenders can be individuals, groups of investors, or mortgage investment corporations. Compared to banks, private lenders are not bound by the same strict lending criteria, making them a more flexible option for borrowers who might not meet conventional standards.

When to Consider a Private Mortgage

1. Credit Challenges

One of the most common reasons Canadians turn to private mortgages is due to credit issues. Traditional lenders might view you as a high-risk borrower, whether you have a low credit score, past bankruptcies, or other credit blemishes. Private lenders, however, are often more willing to overlook these issues if you have a substantial down payment and significant equity in your property.

2. Income Verification Issues

Self-employed individuals, freelancers, and contractors often need help in securing a mortgage from traditional banks due to irregular income streams or the inability to provide standard income verification documents. Private lenders are typically more flexible and may accept alternative forms of income verification, making it easier for these borrowers to secure a mortgage.

3. Time-Sensitive Situations

Sometimes, you need financing quickly, and the lengthy approval processes of traditional lenders can be a hindrance. Whether you're looking to seize an investment opportunity, purchase a new home before selling your current one, or cover urgent financial needs, private lenders can offer a faster turnaround time, often processing applications within days rather than weeks.

4. Property Type and Condition

If you're purchasing a non-traditional property or one in poor condition, traditional lenders may be hesitant to provide financing. Private lenders are often more willing to finance unique properties, such as cottages, rental properties, or homes requiring significant renovations, as they tend to assess the property's value differently.

5. Debt Consolidation

A private mortgage can provide a solution for homeowners looking to consolidate high-interest debts. By tapping into your home's equity, you can secure a private mortgage to pay off existing debts, potentially reducing your overall interest costs and simplifying your financial situation.

Benefits of Private Mortgages

1. Flexibility in Approval

Private lenders are not bound by the same stringent regulations as traditional banks, allowing them to offer more flexible approval criteria. This means that you might still qualify for a private mortgage even if you have a poor credit history or non-traditional income sources.

2. Speed of Process

One significant advantage of private mortgages is the speed at which they can be arranged. Traditional mortgage approvals can take weeks, while private mortgages can often be processed in a few days, providing quick access to needed funds.

3. Tailored Solutions

Private lenders can offer customized mortgage solutions catering to your financial situation. Private lenders can structure the mortgage to meet your needs, whether you need a short-term bridge loan or a longer-term mortgage with unique repayment terms.

Risks and Considerations

While private mortgages offer several benefits, they also come with certain risks and considerations that borrowers should be aware of:

1. Higher Interest Rates

Private mortgages typically have higher interest rates than traditional mortgages. This is because private lenders take on more risk by lending to borrowers who may not meet conventional lending criteria. Investigating these higher costs is essential when considering a private mortgage.

2. Shorter Terms

Private mortgages are often short-term solutions ranging from one to three years. Borrowers need to have a clear exit strategy, whether it's refinancing with a traditional lender, selling the property, or paying off the loan through other means.

3. Fees and Charges

Private mortgages can come with higher fees, including lender, brokerage, and legal fees. These additional costs can add up, so it's crucial to understand all the associated expenses before proceeding with a private mortgage.

4. Reputation and Due Diligence

Not all private lenders are created equal, and doing your due diligence is essential. Research potential lenders thoroughly, check their reputation, and ensure they are licensed and reputable. Working with a mortgage broker can also help you find a reliable private lender.

Conclusion

Private mortgages can be a valuable tool for homeowners. Whether you're facing credit challenges, or income verification issues, need quick access to funds or are dealing with non-traditional property types, private mortgages offer flexibility and speed that traditional lenders may not. However, weighing the benefits against the potential risks and higher costs associated with private lending is important.

Back to Main Blog Page

Download my Mortgage Planner App

My Mortgage Planner App gets you access to a wide variety of premium tools to help plan your mortgage.

Download for Apple Download for Android

Free Mortgage Guides

Educational material, emailed directly to your inbox.

Download Your Free Guide Today
users image

Hi, How can I help you?