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Should you use a private lender?

More homeowners are turning to this lending option for their mortgage needs.

Considered for mortgage situations of last resort because of the extra expense and risk, a private lender can be a viable alternative — unless we help you find a less costly solution first.

May 24, 2024

Private is its own (mortgage lending) animal.

A private lender falls outside the typical mortgage offering. It doesn't have to adhere to the same laundry list of mortgage qualifications required by traditional banks or even some alternative non-bank lenders.

There's no mortgage stress test to worry about and no heavy factoring of credit standing or income sources. Your loan approval is primarily based on the amount of equity in your home and its condition and location.

But it's not all happy-go-hippo as an alternative lending choice. The seemingly 'easier' criteria will cost you more and can come with increased financial risk. Plus, access isn't open to just anyone, as private lenders can be quite particular about loaning out their cash.

We can help you decide if a private lender is the right fit. Or, even better, find a customized solution that can save you more money, time and stress.

Where do traditional banks and non-banks get their funds to lend? The money comes from a mix of sources, including public client deposits (e.g., savings and chequing accounts), bonds and securities, interbank lending, and capital markets.

What is a private lender?

Private mortgage lenders use their own private funds and capital to lend you (mortgage) money, coming from personal, business, or investor sources rather than 'public' depositors or government securities.

As an alternative mortgage category unto itself, these lenders can range from reputable companies to individuals who just happen to have extra cash.

These loans aren't subject to the same stringent regulations as traditional banks and non-bank lenders — which means you're charged higher mortgage rates and fees.

A private lender can also structure their own mortgage terms, which is why having your own lawyer review the contract is essential to understand the fine print.

How does a private lender qualify you for a mortgage?

To be approved for a private loan, the lender typically focuses on:

  • Your amount of home equity (lower loan-to-value ratios are preferred)
  • The value, condition, and location of your home (and other properties, if applicable)
  • Potential for returns in loaning you the money (e.g. through higher rates and fees)
  • The lender may consider your credit score or income source overall, in addition to the above

Some homeowners choose a private mortgage lender if:

  • A short-term lending solution (such as a 3-mon to 1-year term) is needed while deciding the next course of action (for example, if you've lost your job)
  • A newcomer to Canada can't provide a history of Canadian income
  • Despite credit, debt, or income challenges, you want to buy or keep a home
  • To consolidate high-interest-rate debts, a second mortgage is preferred in order to keep the (lower) interest rate on a first mortgage
  • Time is needed to ready a home for sale

"In just 10 quarters through September 2022, the latest national data from Canada Mortgage and Housing Corporation [shows the] private mortgage market share surged 45% ... accounting for more than one in 10 Canadian mortgages."

– Robert McLister, Globe and Mail, Jul 27, 2023

What are the drawbacks of a private mortgage?

Compared to a traditional mortgage product:

  • You'll pay higher interest rates (possibly 10% or more) and fees (possibly 2% to 5%), depending on the lender
  • The higher cost may hinder your ability to keep up payments
  • The lender may decide not to renew your mortgage, potentially leaving you without options to keep your home
  • The contract fine print may include details that quickly increase your costs if you miss payments or need to renew with them

When dealing with a private lender, it's essential to have your own lawyer look over your mortgage contract. We also recommend talking to a financial advisor if you have credit challenges.

Can you exit the private mortgage renewal cycle?

Typically, private and alternative mortgage products help solve a short-term mortgage need, with the home buyer or owner resolving to get back to renewing (or refinancing) with a traditional lender and better rates.

However, within the current higher interest rate environment, many banks have tightened their mortgage qualification criteria (especially as the governing banking body, OSFI, outlined stricter regulations).

As a result, a larger share of mortgage borrowers have to renew their private loans, unable to qualify and switch to traditional products.

History shows that many home buyers and owners will go to great lengths to buy or keep their homes — and private mortgages can play an important role in achieving those goals.

So, if you need a private lender solution, it's important to consider whether its renewal plan fits your situation to help you reach your mortgage goals.

A mortgage of a different kind? We help you sort it out.

At True North Mortgage, our highly trained brokers have access to several lenders — traditional (A), alternative (regulated B lenders), and private. The latter two typically come with higher rates and fees, as your mortgage loan comes with a higher risk to the lender.

We have the flexibility to help match you to the right lender and product. A private mortgage may be the right fit, but we'll first ensure there isn't a short-term alternative that may work better for your situation.

Rounding out your mortgage costs, here's where we can often save you money for the right alternative fit vs the extra costs a private lender might charge:

  • We don't charge extra admin fees (above normal alternative mortgage fee that will apply)
  • We only require one lawyer and one appraisal
  • Our short-term mortgage solutions are open terms, so we don't charge payout penalties
  • We don't charge a bunch of discharge fees
  • We can help you with renewal options

Most importantly, we're upfront and transparent about outlining your details and options to help you make clearer decisions. We're here to help!

Your best mortgage solution is what we do (best).