A private mortgage is an alternative to more traditional products. These come from individuals or financial entities that provide a more streamlined process and quicker application times. They are quite often interest-only loans, where the principal is not reduced during the term of the mortgage.
According to Equifax, private mortgages are a good solution for people with bad credit scores, which are usually below 580. A private mortgage is a useful tool for paying for home renovations and repairs, high interest credit card debt, and living expenses after a work layoff.
Borrowers often approach private lenders like Mortgage Broker Store to consolidate existing debt. Understanding what a private mortgage is and how it can be used is critical. It’s also important to know what makes them different from traditional products. Continue to read to gain knowledge about private mortgages in Ontario.
Private Mortgages and Equity
Private mortgages have a different focus. They rely more on an applicant’s equity in a property or home than on their credit score. Equity is defined as the part of the asset that’s been paid off and is mortgage-free.
Private mortgage lenders will approve or deny a mortgage request based on the equity in the property. These alternative lenders measure equity using a metric called a Loan to Value (LTV) ratio. The LTV ratio is calculated by dividing the total of all existing and proposed debts on a property by the property’s appraised value. For example, if a property is worth $1,000,000 with a $500,000 first mortgage and is requested a $250,000 second mortgage, the LTV ratio on the second mortgage request is 75%. Most Ontario private lenders will lend up to 75% LTV in urban areas and up to 65% LTV in rural areas.
Eligibility Criteria for Borrowers
One big difference between a private mortgage and a traditional one is how lenders use the credit scores for each. The credit score requirements for a conventional loan are narrow and strict. One of the two credit agencies in Canada, Equifax, reports that fair credit scores range from 580 to 669. Those numbers are essential for banks and credit unions. Traditional lenders require good credit scores, while private lenders do not.
Traditional lenders also look for verifiable income. They will usually want to see T4 slips, perhaps an employment letter and recent pay stubs. Private lenders are considered C tier lenders, and their requirements regarding income are more flexible. Traditional lenders require a large amount of reported income, while private lenders do not.
Private mortgage lenders can accept any level of income from any source. There are also lenders that can approve mortgage requests at any credit score.
Benefits of Private Mortgages
There are several benefits to private mortgages over more conventional ones. They include:
- Faster turnaround times than conventional banks.
- Approvals are based on equity. Banks and credit unions are more strict, and they need two years of pay stubs for income verification and other criteria.
- Private lenders accommodate people with bad credit histories. Conventional banks and credit unions, according to Equifax, rely heavily on a credit score number of 580 and up.
- The money from a private mortgage can stop the process of a power of sale or foreclosure.
Another bonus is the streamlined process and flexibility. First, private lenders will accept income that traditional banks won’t. That can include contract work and the irregular cash a sole proprietor makes.
Private lenders also allow you to tweak your mortgage repayments to suit your finances.
Like any other financial product, some risks are different to consider.
Interest Rates and Terms
Typically, the interest rates for a private mortgage are higher than those of a more traditional institution. Private lenders help people who can’t always get a mortgage from a conventional source due to bad credit. Other reasons people turn to these lenders include unforeseen repair expenses and renovations.
Interest rates can range from 8% to 12%. Borrowers looking for a private loan need a lot of home equity and can only borrow up to 75% of the property’s value in mortgages. The terms of the typical private mortgage can range from 6 months to 2 years.
Interest rates offered by private lenders also vary on the LTV ratio of the proposed mortgage request. The closer the LTV ratio is to the lender’s maximum, the higher the interest rate will be.
Here is an example for a property with a $500,000 first, is requesting a $250,000 second, and has an appraisal value of $1,000,000.
(500,000+250,000)/1,000,000 = 75%
Since this mortgage request is at the lender’s LTV ratio limit, the offered interest rate is likely to be 11% to 12%.
Risks and Considerations
Private lenders charge higher interest rates. As of June 2024, private loans have 8% to 12% interest and 4% to 8% in fees. It’s important to remember that most, if not all, private mortgages are interest only. With these, you won’t be knocking down any of the principal on a mortgage.
Having an exit strategy is an essential part of dealing with private mortgages. Refinancing with a more traditional institution is one path. You might need to use a transition time to work on your credit score. Equifax has some tips on understanding how to keep a credit utilization rate below 30%. That’s the amount of revolving credit that you are using divided by the total amount of credit available.
Selling the property is another option and an exit strategy that can pay off a private mortgage.
Looking for Private Mortgages in Ontario?
Mortgage Broker Store focuses on numerous mortgage-related products. One of our priorities is mortgages that don’t meet traditional lending institution requirements. Our team includes private lenders, brokers, and licensed mortgage agents. Let us help you prepare for and get a private loan that meets your specific requirements. We can supply the funds you need to halt a power of sale or foreclosure.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
