With the mortgage rules constantly changing, private or alternative mortgages are becoming the only way some people can refinance or buy a home. When the banks turn borrowers down the next option is to look at "Subprime" lenders. There is a significant misconception applied to this "subprime" market. Many believe these alternative or private mortgages are only for bad people, but don’t let the word “subprime” scare you, these lenders are in no way inferior to banks. Canada's lending practices are very strict and all federally regulated, these "subprime" lenders are simply an alternate option for mortgage products to cover an area of lending that the banks will not.
What is Private Mortgage Financing and who uses it?
Private mortgage financing can be an excellent alternative for those that are either:
1. Self-Employed and declare little or no income
2. Micro-condos that are less than 600sqft
3. Foreign investors
4. Non-residents of Canada
5. Credit Challenged
6. Owe CRA back taxes
7. Property Taxes that are in arrears
8. People going through a foreclosure
9. Construction financing and commercial loans
10. Equity takeouts for starting a business
11. Short term financing that is open and without penalties
12. Don’t want to refinance their 1st bank mortgage as the penalties are too high.
13. Requiring funds up to $20 million dollars
Banks, and many brokerages, don’t specialize in private financing. It is a more specialized area of mortgage financing and must be handled differently than a traditional bank type mortgage. If it’s submitted without care and due diligence, you may pay a higher rate and hefty fees!
When applying for a traditional mortgage (based on T4's, good credit and saved down payment) the CLIENT is qualified based on the PERSON first, then the property. When you apply for private financing, the PROPERTY is qualified for the mortgage first and then a few details about the client are reviewed and qualified.
What the private lender is lending on is Location, Location, Location! When it comes to alternative or private mortgages a property in a marketable area, such as Oakville or Mississauga, is the type of properties that private lenders like. The risk is lower, so they can offer better rates. That's not to say properties in small communities can't be financed, there are options for those as well. Mortgages are also available for remediated, non-remediated and legal grow op properties as well.
Valuable and marketable properties can get financing with 15-20% down, but you can expect to pay 2-3% higher rates than if you have 25% down, as there is more risk taken by the lender. The rates for a 1st mortgage today (2017) can be as low as 6.99% for a strong mortgage file to 10% for a less desirable property. 2nd mortgages can range 12-15%. The bonus of course, is that you can opt to pay “interest only” and it can be fully open so you don’t have to pay the penalty to break the mortgage.
There are almost always fees for private mortgages. This is how the broker is paid for working on your deal. Fees depend on your broker, I have seen as low as $500 to as high as 5% of the amount you’re borrowing; the average is 1% (for example: $400k mortgage would have a $4,000 fee), so it is good to ask the fee costs upfront and ask a few brokers that specialize in private financing.
If you get short term (1-2 year) private financing, as your mortgage agent, I want to ensure we have a plan in place it have to moved to a traditional low rate mortgage as soon as possible. This is especially true if the reason for the private financing is credit, income or back taxes. We will work together to ensure this plan happens and is followed through.
There are many private lenders and their rates, fees and what they will fund vary. Contact me so that I can help you problem solve and find a reasonable solution that your bank can’t offer you. It’s quick and not as costly as it may seem, if it meets your immediate needs.
When we say Yes! We stand behind our promise.
Meghan Van Houten - Mortgage Agent
416-709-9062 | 1-877-366-3487
Independently owned and operated
202-120 Traders Blvd. E., Mississauga ON L4Z 2H7