Published: October 8, 2019 • Last updated: May 6, 2020 at 16:20 pm
In this final third article in my 3 part series covering everything you ever wanted to know about a Private Mortgage but were afraid to ask, I focus on everyone’s big question: “What does a private mortgage cost?” Unlike most traditional mortgage products, there are several costs and fees you may not be expecting, and terms and benefits that come with that, so it’s important to understand the total cost, and not focus exclusively on the interest rate.
If this is the first article you’ve discovered in my series, you may find it helpful to read my introduction in Part 1 (Private Mortgage FAQs for Canada: What is a Private Mortgage and When Would You Need One?), and Part 2, my deep dive into the situations that create the need for a private mortgage (When Is a Private Mortgage the Best Solution?).
What Is the Total Cost of a Private Mortgage?
If you are in a situation where only a private mortgage will get the job done, it is important to understand this is NOT a world you want to stay in any longer than you are required to do so. And, at the same time, appreciate that this world exists, because private mortgages often solve problems for which there would otherwise be no solution.Unlike traditional mortgage products, private mortgages have several costs and fees you may not be expecting, so it's important to understand the total cost, and not focus exclusively on the interest rate. #PrivateMortgageCosts Click To Tweet
You want to understand the total cost of borrowing this money. Do not simply focus on the mortgage interest rate – there are several other important costs associated with a private mortgage. These costs include:
- direct loan costs including interest rates, term and amortization period
- loan-related and setup costs including lender fees, brokerage fees, and legal fees
- closing and administrative costs including appraisal fees, renewal fees, and collection and management costs should your payments go off track
What Are Private Mortgage Interest Rates?
Typically, private mortgage interest is compounded monthly, whereas regular mortgages are mostly compounded semi-annually. Monthly compounding results in a higher effective interest rate and payment.
In other words, you can’t directly compare interest rates with conventional loans, because the interest is calculated differently. For example, if you borrow $100,000 at 12% per annum, compounded monthly the payment is $1,000, whereas compounded semi-annually the payment is only $975.88.
Private mortgage interest rates are a lot higher than those offered by your bank and even higher than rates offered by alternative (or B) lenders. And, as you’d expect, the rates are generally higher for private second mortgages than for private first mortgages.
- Private first mortgages – Most are in the range of 5.99% to 7.99%. Some lenders go lower for lovely mortgages, and others will be higher for riskier mortgages.
- Private second mortgages – Prior to COVID-19, most lenders quoted “starting at 8.99%” Some go even lower, and others will be considerably higher for mortgages with a risky profile. As of mid-April 2020, there is far less interest in investing in private second mortgages. They are more expensive and harder to qualify for.
Note the words “starting at”. If someone calls me and asks about the best rates, it is a topic I am reluctant to get into, because there are so many factors involved when determining the actual rate you will receive. Let’s have a chat first so I can gauge what kind of lenders your particular mortgage needs will attract.Not only are private mortgage interest rates a lot higher than rates offered by your bank, but interest is also calculated differently with most private mortgages compounding monthly versus semi-annually at a bank.… Click To Tweet
The stronger the file and the lower the loan-to-value ratio (LTV), the better your rate quotes should be. And the reverse is equally true, of course.
Offers vary dramatically depending on where your property is located. In fact, in some parts of Canada, it is extremely difficult, almost impossible even, to find a private lender. Well, populated areas with a decent turnover of real estate attract the best pricing.
In the GTA, prior to COVID-19, it was quite common to find private lenders who would lend as high as 75% or even 80% LTV. Outside the GTA, these ratios would drop by 5% or more. Some mortgage investment corporations (MICs) were boldly offering to lend up to 85% or even 90%. In this situation, however, it is important to ensure your exit strategy is top of mind so you are not stuck in a private mortgage longer than necessary.
But these days (mid-COVID-19, the lower the loan to value ratio the better. First mortgages might peak with most lenders at 70% to 75%, and second mortgages, if available, might peak at 50% to 65%.
What Is the Term of a Private Mortgage?
Most private mortgages have a one-year term. It is, however, often possible to arrange for a two- or even three-year term depending on your circumstances. Also, you may be able to structure your mortgage to mature at an exact date in the future to coincide with your maturing first mortgage. Or you may be able to negotiate the mortgage becomes open after some months.
And, you also want to ensure you are with a lender who is open to renewing your one-year term if it may be at all necessary.
What Is the Amortization Period of a Private Mortgage?
Most borrowers are happy to learn private mortgages are typically offered with interest-only payments. This has the advantage of keeping the monthly payments as low as possible. The downside, of course, is the borrower makes no inroads on the principal balance owing.Private mortgages are easier to arrange in major cities where lenders perceive lower risks. You may get a lower interest rate and higher loan to value ratio because properties are easier to sell if things go wrong.… Click To Tweet
An amortizing mortgage is often there for the asking and, in fact, some MICs want amortized payments (25 to 40 years is the usual range).
Here are some sample payments to illustrate the impact of varying amortization periods. The difference is not as much as people typically expect:
- $300,000 borrowed at 7.99% interest-only payments, the monthly payment is $1,998
- $300,000 borrowed at 7.99% with a 40-year am, the monthly payment is $2,084
- $300,000 borrowed at 7.99% with a 25-year am, the monthly payment is $2,314
What Are the Out-of-Pocket Costs of a Private Mortgage?
There are several significant costs to be aware of when accepting a private mortgage that goes above and beyond the mere interest rate. Typical private mortgage transactions involve lender fees, brokerage fees, legal fees and appraisal costs, which are outlined below. And you should also be aware of your lender’s renewal terms as well as costs for services required if your mortgage payments get off track before signing on the dotted line.
What lender fees can I expect with a private mortgage?
Most private lenders charge a set-up fee when arranging your mortgage. This may also be called something else such as a commitment fee, placement fee, administration fee, or lender fee. Some charge more than one such fee.
A few MICs separate themselves from their competition by not charging a lender fee. Also, some wealthy individuals lending out their own money may not charge much of a lender fee.Total private mortgage costs include many out-of-pocket charges such as lender fees, brokerage fees, legal fees and appraisal costs. There may also be high renewal costs and penalties if payments are missed. #PrivateMortgageCosts Click To Tweet
By not charging a fee, lenders’ offers stand out in an increasingly competitive lending landscape. While there are probably fewer than 50 A lenders and B lenders combined, all chasing your mortgage dollars, there are hundreds of private lenders.
You should also be aware that once you indicate acceptance of a private mortgage, the clock starts ticking and you may be responsible for interest costs if the mortgage funding date is delayed for any reason.
Private lenders are usually looking for a minimum total annual return on their money. In fact, some will offer flexibility to brokers dealing with fee sensitive clients. For example, offering a 10% interest rate and no lender fee, or an 8% interest rate with a 2% lender fee. The result is the same, but the optics are different.
Private Mortgage Brokerage Fees
Your mortgage broker gets paid by you, the borrower, from the mortgage proceeds. The amount varies from broker to broker, and from loan to loan. If a percentage approach yields too low a number, lenders and brokers will often charge a fee that is the greater of a dollar amount, $5,000 for example, or a percentage of the loan amount.
Factors brokers consider are:
- The complexity and level of effort they anticipate to fund your mortgage
- The size of your mortgage. The smaller your mortgage, the larger the fee may seem as a percentage of the loan amount and, the larger the mortgage, potentially the smaller the fee may seem as a percentage of the loan amount
If you are buying a property, lender and brokerage fees come from your pocket. If you are refinancing, they are deducted from the mortgage advance, if there is enough equity to do so.
Private Mortgage Legal Fees
Provincial regulations vary across Canada. In Ontario, for instance, most private mortgages require two lawyers – one representing the lender and the other representing the borrower. The borrower pays for both lawyers.
As a starting point, you should budget $2,000 for the lender’s lawyer fees and disbursements, and at least $1,000 for your lawyer providing you independent legal representation.
Since private mortgages sometimes entail debt payouts or removal of liens and garnishments, you should expect additional fees for such services.
Other Private Mortgage Costs and Administrative Fees
As with most other costs associated with private mortgages, miscellaneous costs and administrative fees are also higher than with a traditional mortgage. Most notably, these include the appraisal and renewal costs if you aren’t able to transition to an ‘A’ or ‘B’ lender at the end of your term.
What does a private mortgage home appraisal cost?
As with most mortgages, you can expect to pay for an appraisal. From time to time, lenders hungry for business may offer appraisal rebates, but it rarely happens. Private lenders prefer to work with conservative appraisers, and they cost a bit more than the run of the mill appraisal. Don’t expect a really high valuation.
What is the fee to renew a private mortgage?
Some lenders charge annual administration fees and most will charge a renewal fee if you accept their renewal offer. Renewal fees vary dramatically from lender to lender. Some are a flat dollar amount – from a few hundred dollars to say $1,500. Others charge as much as they did when they issued the initial mortgage, making their renewal process extremely expensive.Remember — although private mortgage costs are higher than traditional mortgages, that's because of higher risk, and they exist to solve problems that would often have no solution otherwise. #PrivateMortgageCosts Click To Tweet
Summation of Private Mortgage Costs and Takeaways
- If there is a chance you will need to extend your mortgage past the initial maturity, be sure you understand the renewal fees before you sign the commitment.
- All out of pocket fees and costs associated with this mortgage financing must be fully disclosed to you according to your provincial mortgage regulator’s rules.
- You will find there are no hard and fast rules – every lender is different and every borrower situation is unique. Use this article to help you ask the right questions.
That concludes my 3 part series exploring the little known, and even less understood domain of private mortgage lending. We covered a lot of ground, starting with an introduction to the basics and the most frequently asked questions (FAQs) I hear about private mortgages, to a deep dive discussion of the types of problems that are best solved by a private mortgage and when you might want to consider one, and finally a detailed analysis of the costs associated with a private mortgage.
It’s a lot to take in, and I welcome your questions if there is anything you need to better understand, or if you think you might need a private mortgage and need our assistance in crafting the right solution for your needs.
- Private Mortgage FAQs for Canada: What Is a Private Mortgage and When Would You Need One
- When Is a Private Mortgage the Best Solution?
- Alternative Mortgage Lenders Canada: Bad Credit, Private & Second Mortgages
- Private Second Mortgage Solved Big Problems
- Private Mortgages Save Day