Published: September 20, 2019 • Last updated: December 9, 2020 at 20:13 pm
This is the first in a three-part series of articles that explains the little known and even less understood domain of private mortgage lending. Here, we discuss the basics — what is a private mortgage, why would you want one, what problems do they solve, how they are priced, providing answers to the most commonly asked questions by consumers who wonder if this is the right product for their needs.
Private Mortgages a Huge Game Changer If You Can’t Qualify For a Traditional Mortgage
The majority of homeowners and homebuyers are only vaguely aware of private mortgage options. That is until this solution becomes a gamechanger after you fail to qualify for a more traditional mortgage.
There is a growing percentage of borrowers who need a totally different type of mortgage financing solution, particularly since new mortgage stress testing qualification rules came into effect in 2018. Sometimes there is no choice.
Or, rather, the only choice for buyers may be to accept a private mortgage in order to complete their purchase, and for current homeowners needing to refinance, a private mortgage may be the only alternative to the harsh reality of having to sell their current property.
Could this happen to you? Who would you count on if your bank turned you down for a mortgage? How would you know if you were being given the straight goods? Who can you trust?Since Canada's mortgage stress rules were introduced, a growing percentage of borrowers are being forced into different types of mortgage financing in order to realize their dream of homeownership. #mortgagestresstest Click To Tweet
What Are Your Options If Your Banking Institution Refuses To Grant You a Mortgage?
If your primary financial institution (bank, credit union or trust company) refuses to qualify you for a mortgage and you want to hang on to your home, you need to work with a mortgage broker who can explore alternative financing options on your behalf.
The first step is to look at a “B lender” solution. Following a recent interview with BNN, Albert Collu, President of M3 Mortgage Operations said:
“By and large the growth of alternative mortgages is a benevolent market response to meet the consumer demand spurred on by deeper regulation and the tightening of the mortgage qualifying rules.
There is no shortage of reputable institutions offering alternative mortgages responsibly to aid borrowers who simply cannot qualify in conventional ways – and these lenders are doing so with the watchful eye of the regulators looking in which should be a signal that these loans are not nefarious but underwritten with purpose and social responsibility to consumers and investors.”
Some of these wonderful institutions are Home Trust, Equitable Bank, and Haven Tree Bank which have traditionally offered these loans over a number of many years. In conjunction with these lenders, we are seeing another segment of reputable lenders widening their offerings as they expand into alternative lending such as First National (Excalibur), MCAP (Eclipse), Merix (NPX), CMLS (Aveo), to name a few.
There are literally hundreds of thousands of Canadians that can share moving stories about the role alternative mortgages have played (and continue to play) in fulfilling their dream of home ownership and/or to aid in their financing needs at any given moment”
Still, some mortgage borrowers do not fit into the world of alternative lenders either. And in that case, you will need a private mortgage solution.
Private Mortgages Are Rapidly Gaining Market Share Versus Traditional Mortgages, But Why?
In November 2018, The Bank of Canada published an article that said: “Recent policy changes are having a clear impact on the mortgage market…Tighter policies around mortgage qualification and higher interest rates are having a direct effect on the quality and quantity of credit… Areas with high house prices, such as the Greater Toronto Area (GTA), could, therefore, see more borrowers obtaining mortgages from private lenders because they might not be able to qualify with other lenders.”
In fact, by the second quarter of 2018, private mortgages represented 8.7% of all mortgages in the GTA – up substantially from 5.9% in 2017. That’s nearly 50% growth in market share in less than a year.
What’s different about a private mortgage?
A private mortgage is typically offered by either a Mortgage Investment Corporation (MIC) or directly by wealthy private investors (individually or syndicated). MICs are pools of capital invested in private mortgages. According to a recent CMHC report, in 2018 there were 200 to 300 active MICs in Canada. It is unknown how many other private lenders there are, but to say there are thousands seems prudent.Market share for private mortgages in the Toronto/GTA region grew by nearly 50% in a year because of higher rates, the stress test and rising house prices. Source: Bank of Canada, Nov 2018 #privatemortgages Click To TweetNot all 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.
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.
Are Private Mortgage Terms More Flexible?
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. 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.
Why Should You Always Arrange Private Mortgages Through a Licensed Mortgage Agent Or Broker?
Experienced brokers typically develop a small network of their go-to lenders. These are lenders we trust and have built relationships with, based on winning mortgage solutions that are fair for borrowers.
Reputable lenders have thought through all critical aspects of their businesses, including underwriting, legal, administration and customer service. This empowers them to have well-defined processes in place that make them a natural choice for partnering purposes.To ensure that you're dealing with trusted lenders and that all the right documentation is set up, always arrange a private mortgage through a professional mortgage agent or broker. #privatemortgages Click To Tweet
What determines the rate and fees?
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 few 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. (eg, 16 months and 4 days)
- Allow you to prepay part or all of your monthly payment so that your cash flow matches your comfort level
- Enable the mortgage to become open – as early as two, three or six months after it commences
What Are the Top Things You Need To Consider When Designing a Private Mortgage Solution?
Much like any mortgage option, there is no one-size-fits-all private solution. So, in order to decide how best to help you, it’s important to first fully understand your current situation. Here are some common questions you can answer to help flesh out your details:
- What are the issues that preclude an “A or B Lender”?
- Are we trying to solve a specific problem?
- Will the problem go away after this mortgage transaction or is it a longer-term issue?
- If there is a good chance this mortgage needs to stay in place past the first year, what are your lender’s renewal policies?
- What is the plan to pay off the private mortgage (“The Exit Strategy”)
That completes the overview of private mortgages, answering the most common questions people have about them. In Part 2 of this series, I’ll take a much deeper dive into the scenarios for which you might require a private mortgage, and explore additional details about your private mortgage options. I’ll also discuss the importance of having an exit strategy in place to get you back into a more traditional mortgage with more favourable rates as soon as possible, as well as looking into your renewal options just in case. Also, watch for Part 3 where I discuss the total cost of a private mortgage.