According to the Effortless Mortgage blog on Private Mortgage Lending and Lenders in Ontario, “Private mortgage lenders…are non-bank lenders, typically individuals and investors, who charge only interest for a 6-month to 2-year term.”
What you need to know about private lenders is that they have more flexibility on income and credit whereas banks have very specific income and credit requirements. If you don’t meet the income and credit criteria, banks most likely will not approve you for a mortgage. Private lenders, however, look at the “whole picture” of your financial situation with a focus on the property, such as location, purchase price, down payment, etc.
Types of Private Lenders
There are three main types of private lenders:
Individual lenders can be family, friends, or anyone willing to lend their own money. Typically, investing in real estate will provide them better returns than if the money just sits in banks. And they may feel more comfortable investing in the housing market than the stock market.
- Mortgage Investment Corporations.
MICs are a group of investors who will pool their personal funds to invest in multiple mortgages. The MIC then uses this pool of investor money to fund mortgages on a case-by-case basis.
- Syndicate Investors
Similar to MICs, syndicate investors are a group of investors who will pool their personal funds for one mortgage. However, they typically fund larger projects like high-rise condos.
Differences with Private Lenders
As with other lenders, they all have something to offer than the other. Here are some key differences with private lenders:
Private Mortgage Rates
It goes without saying that private lending rates will always be higher than traditional lender rates because the private lenders are taking higher risks. The rates range from 6.99% to 12.99%. For a second mortgage behind an “A” or “B” lender, the rate would be 10-15%.
Private lender rates are affected by a variety of contributing factors, such as: down payment amount, loan-to-value, the type of property you are purchasing, and property location and value.
Additionally, private lenders typically only offer short term loans (from six months to two years). And, many private lenders offer interest-only loans which help your cash flow.
At Effortless Mortgage private mortgages, who have their own in-house private lenders, private lending rates can start from 4.99% for 1st mortgages and 6.99% for 2nd mortgages.
Private Lender Fees
Private lender fees range between 1% – 3%. In a home refinance, if you have enough equity in your home, you may be able to include lender fee into the mortgage instead of paying up front.
The fee usually goes to pay the mortgage broker (middleman) and the rest is intended to make sure they make money even if you pay off the mortgage early.
At Effortless Mortgage, they offer $0 broker fee because they have their own in-house lending offering direct-to-consumer private mortgages. This can save you up to 1% on fees! They ensure you get the lowest fees and get approved fast.
Some private lenders keep a holdback that is typically like one month’s rent that your landlord keeps as a security deposit. Some lenders hold back a cash amount equivalent to some or all of your payments for the year if the term loan is one year. The safest, but more expensive, option is to have a lawyer keep the holdback money in a trust account.
What you need to know about private lenders is that you will typically need to pay for your own legal fee as well as the lender’s legal fee. The borrower pays for both lawyers.
The legal fees for borrowers are typically between $1000 to $1500. For the lender’s legal fees, it can be up to $3000.
Deciding on a private mortgage lender can be complicated. With mortgage brokers like Effortless Mortgage who specializes in private mortgages can help you decide, save time and can help you find the best private lender to suit your needs. For more information, read the comprehensive guide on private mortgages and private lenders.