Private Mortgage – FAQs

A private mortgage is typically offered by either wealthy private investors (individually or syndicated) or by a Mortgage Investment Corporation (MIC). MICs are pools of capital invested in private mortgages.

Not all individual investors want to be included in a pool with other investors. Some may wish to cherry-pick specific types of loans to fund and lend the entire amount, as opposed to having a tiny piece of interest in dozens of different mortgages.

According to a recent CMHC report, in 2018 there were 200 to 300 active MICs in Canada. We do not know how many other individual private lenders there are, but to say there are thousands seems prudent.

Private mortgages can be offered in first, second or even third position. They’re typically one-year terms, and rarely longer than two years. Private mortgages can also be used to cover more than one property concurrently – known as a blanket or inter-alia mortgage.

Some private lenders require amortized payments (25 to 40 years), while most are content to receive interest-only payments. This is good for optimizing your cash flow, but the downside is your outstanding private mortgage balance will remain constant over the term because you are not paying down the principal mortgage amount, just the accrued interest.

The important thing is that you may have more choices than with a traditional lender.

In our business, the privates we see are mostly second mortgages, and occasionally a first mortgage. There are many lender choices but, as an expert, over time I’ve developed a good feel for which types of mortgages fit best with each lender.

Lender pricing is often matrix driven, depending mainly on location, loan to value, applicant credit quality and the property itself. As an occasional private lender, I personally consider all aspects of the transaction, not just the property. Some lenders, however, focus primarily on the property and do not even care to verify income and employment.

Industry veteran Steve Futyer says “ It’s the APR ….not the rate. If you got 5.99 and a fee of 5% you are still at 10.99%. As an investor why would you do a deal in 2nd position for less than 12% return?”

Private mortgages are typically not as tech-savvy as bank options. For instance, you are not likely to have online access to your mortgage the way you would with a traditional mortgage lender. And you may even have to provide post-dated cheques for your mortgage payments.

But you will find some lenders can be extremely creative in terms of structuring a mortgage that suits you. For example, they may:

• Give you an odd-looking maturity date to exactly match your current first mortgage.
• Allow you to prepay part or all of your monthly payment so your cash flow matches your comfort level
• Enable the mortgage to become open – as early as two, three or six months after it commences

The banks do not offer private mortgages. Ever. They lean towards applicants with good credit, verifiable income and overall decent personal finances. Private mortgages cater to people who do NOT qualify at the bank, and they are differentiated by shorter terms, higher rates and also fees.

The best private mortgage lender is the one whose offering matches up closest to your unique circumstances. For example,

• If you only need a private mortgage for a short term, find a lender who will accomodate this on reasonable terms.
  
• If your situation is going to remain the same for years to come, find a lender who does not charge high annual renewal fees.
  
• If you need a private mortgage very quickly, find the best lender who can accomodate this on reasonable terms.
  
• If you need a private mortgage which is really flexible, and open for prepayment, find the best lender who can accomodate this on reasonable terms.

Most private mortgage lenders prefer properties which have resale potential, in case things go sour. They may shy away from rural areas or properties with well and septic, or in some less travelled parts of the country.

That said, there may well be a lender who specializes in your situation, even if you do live well off the beaten track. Search online for a reputable mortgage broker who indicates they are a private lending specialist.

Search online for a reputable mortgage broker who indicates they are a private lending specialist. Read their online reviews and prepare a short list of questions to help you better select the right one.

Almost all the time, a bank mortgage will be better and cheaper for you, compared to a private mortgage solution. Most of the time, a private mortgage is required because there is NO bank mortgage on offer.

The ideal private mortgage lender does not take advantage or use their leverage to be aggressive. If there is a need for an extension, they don’t turn it into an opportunity to be unfair or predatory.

If there is a need for an accommodation, they don’t leverage it into a money grab. They work with people. They welcome people to stay with them, but don’t obstruct when they leave.

This question came to us on September 20, 2022. And the client wanted to know what impact the rising rate environment has had on private lender.

The answer depends on whether it is a first or second mortgage; what the loan to value ratio is; location of the property; personal credit scores etc.

These days we are seeing lenders want at least 10% total return on first mortgages (example 7.99% rate and 2% lender fee) and at least 13% for a second mortgage (example 9.99% with a 3% fee)

If the application is strong and there is lots of equity in the property, we have several individual investors who will only charge as low as 6.99% interest even on a second mortgage. And reasonable fees too.