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Buying a house in Canada in 2021 is a dreamable thing. Housing prices are surging and the federal government has stepped in to cool the real estate market. Tighter mortgage restrictions are being applied to settle things down. Owing to this, Canadians are finding it extremely hard to qualify for a traditional mortgage. Take, for instance, the most recent changes to the mortgage stress test in Canada caused most Canadians to lose 5% of their home buying power.
However, for others, Canada’s tighter lending policies might prevent them from getting a mortgage from a traditional lender at all. Especially if they have no credit or bad credit. In these cases, it is common to consider alternative options from one of Canada’s major lenders.
One of the most common alternatives to traditional mortgage is a private mortgage. This type of mortgage can be helpful to some borrowers. With this having said, a private mortgage has several pitfalls that should be considered before choosing this option. So, if you are interested to know more about private mortgages, continue reading this guide.
What is a Private Mortgage?
Any mortgage from an individual or company that is not a federally regulated bank. It can be from a wealthy family member or any other private individual. Usually, they are offered by companies who have realized that the conservative lending guideline used by banks and other federally regulated lenders exclude individuals.
Private mortgages are typically interest-only mortgages with terms from one to three years, making them an option to bridge your financing until your financial situation redeems. There is also less hassle in qualifying and processing of this mortgage as compared to a traditional mortgage.
Difference Between Private Mortgage & Traditional Mortgage
Although private mortgages have few features of a traditional mortgage, the two financial tools differ in a lot of ways. The most significant difference is the structure of the loan. When you apply for a traditional mortgage, you will qualify for a loan amount at a specific interest rate.
The payments you will make will be a blend of the interest on the loan and the principal. Once the loan term expires, you will be left with a smaller mortgage principal balance. Also, the option of either renewing it or moving to a new lender will be provided to you.
However, with a private mortgage, you will qualify for a loan at a specific interest rate. Your payments will be the interest only. So, at the end of your mortgage term, you will have the same loan like the one you started. You can either renew it from here to move to another lender. The option of paying down the full mortgage is not available. In simple words, if you take it, you will never be mortgage free.
Not only this, but private mortgages are also riskier. Your mortgage interest rate will be higher, sometimes much higher than a traditional mortgage. For instance, while a traditional lender will typically have an interest rate in the low single-digit, a private mortgage will have an interest rate ranging from 10 to 18% at minimum.
Who Should Get a Private Mortgage?
With all these negative points of a private mortgage, you might already be wondering what’s its use? If yes, here is the answer.
A private mortgage is not for everyone and should be sought only after the following circumstances.
- Bad Credit: If you have damaged your credit score in the past, a private lender will still issue you a mortgage. If you need some time to repair your credit score, you can take a private mortgage, and then once all is good, switch to a traditional lender.
- Unconventional Property Purchase: If you are going to buy an unconventional property, a traditional lender may not approve your mortgage. However, a private lender will accept it.
- Unconfirmable Income: Confirm income is the major requirement of a traditional lender. So, if you do not have any and need a loan, a private mortgage might work best for you.
Even if you are facing these three critical financial problems, you must rethink before taking the private mortgage. Consider all the private lenders carefully, evaluate their interest rates and fees, and determine if the choice is worthwhile or not.
If you cannot find any possible way to get out of the financial mess, and taking the private mortgage is your last resort, here is what you should know about getting the approval.
The qualification criteria are different in private mortgages. Traditional lenders focus on income and credit scores with minimum requirements that are federally regulated. As opposed to which, private lenders focus more on the lender’s property value and type to determine whether to lend to you or not. In addition to this, they consider the income, down payment, and home equity of the lender when deciding on a mortgage refinance.
If your score is lower than 680, your chances of getting a traditional mortgage are absolute. But, luckily, you can get private with the lowest credit score as well. If you are taking a private mortgage, make sure you make your monthly payments on your loan faithfully. Also, make sure you strive to improve your credit score.
If you take it but cannot keep up with the payments, you will further damage your credit score.
Should You Get Private Mortgages?
Today, taking a private mortgage is a topic of discussion more than ever before. At first glance, this might seem the only viable option as well. However, unless the circumstances prevent you from qualifying for a traditional mortgage, do not think getting it is a good idea. The high-interest rate and fees make servicing a private mortgage expensive.
Additionally, you will not be paying down the loan principal, but the interest. This means you will not build equity in your home or improve your financial situation as far as you are in this.
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The Bottom Line
If you are thinking about taking it, you should have a real estate lawyer review the documentation to ensure you understand all the associated fees and possible penalties. Know that private mortgages are not federally regulated. Thus, fine print differs from a traditional mortgage.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, leave us a message and we will try to connect you with local realtors and sourcing for financing.