Unpacking private mortgage rates

The first step in understanding private mortgage rates is to get back to the basics.  Let’s start with covering those….

What is a private mortgage?

Simply put, private mortgages are offered by Canadian mortgage lenders who aren’t your typical “A” or “B” lender.   Big names are Fisgard or New Haven, but the private lender can be a small, medium or large mortgage investment company (known as a MIC) or even individual investors who are lending their own money to borrowers.  The role they fill is to lend money when the A and B lenders have said no to your application.

How does a private lender determine what interest rate to charge?

You won’t see private lenders presenting a rate sheet like you would see with A lenders.  This is because every situation is different, and they decide on their pricing based on the risk your application presents.  Because of this, your best bet is to be very forthcoming about your financial situation.  While some lenders are fine with almost no documentation other than an appraisal of the property, you’ll see that reflected in a higher rate.

What is factored in:

• Private lenders are interested in the quality and value of the property.  The better the home’s condition, the better the rate.
• If you have a lot of equity in the property, it’s less risky for the lender.  So the lower the “Loan to Value“, the better your rate.
• If you can show that you have income coming in, even if it’s not at a level that would satisfy an A or B lender, your rate will improve.
• A logical exit strategy.  If you’re planning to pay out the private mortgage by refinancing once your situation improves, or you’re planning on selling the property in a specific time frame, that will positively impact your rate as well.

What scenarios make sense?

The decision to go with a private mortgage has to make sense.  The key: they are intended to cover you for a relatively short period of time.  Here are some scenarios when it is a good solution:

• You’ve lost your job and need money to tide you over until you are employed again.   At that point, your income would allow you to pay out the private mortgage by refinancing with a traditional lender.
• You have too much debt and need money to keep your credit good and give you a financial buffer until you can get the property sold.
• You need funds to pay off CRA, property tax, or mortgage arrears on your existing mortgage, and to avoid Power of Sale or foreclosure.  A private mortgage can give you some breathing room until you can get the property sold, or find another solution to get back on track.
• You’ve sold your existing property and bought a new property, but your purchase closes before the sale.  You need bridge financing, but your lender doesn’t offer it.  (Particularly in the case of B lenders, only a few offer bridge financing, so a private bridge loan may be the only solution)
• You sold your existing property and bought a new property, but the sale of the existing property fell through.  A private mortgage can tide you over until the property is sold again.

So what are the rates?

In general, the private mortgage rates you’re looking at are in the 7-10% range for a mortgage in “first” position (i.e. it is the only mortgage on your property).  They go up from there, since this becomes more risky for the lender.  So a mortgage in “second” position is likely to be in the 10-13% range.  If the total loan amount (including existing mortgages) is over 80% of the value of your property, it is considered much more risky, so the rate will be on the high end of the range.  If the loan amount is much lower than 80%, then you’ll qualify for a better rate, toward the lower end of the range.

What about fees?

When you’re looking at the cost of the mortgage, you need to know that fees will be applied as well.  Mortgage brokerage fees are generally 1-2%, and there is typically a minimum fee.  Lender fees are usually in the 1-3% range.  Again, there might be a minimum.  You’ll be responsible for paying for the appraisal, and the cost of the lenders’s lawyer.  You might also need to pay for a lawyer to provide you with independent legal advice.  If the mortgage is $50,000 or less, then this is recommended, but optional.  If the mortgage is over $50,000, it is mandatory.

How do you make sure you are getting the best private mortgage rates?

Private mortgage rates vary widely, as do the fees.  It is very important that you ask lots of questions to make sure you’re getting the best deal.  Not all mortgage brokers are experienced in this area.  The same goes for real estate lawyers.  You need to know that you are working with a team that will represent your best interests and who will outline all the costs up front.  Don’t hesitate to question the rate and fees, and let them know you might be getting a second opinion.

Private mortgage questions?

Let me know if I can help.  I’m happy to answer any questions or to give you an opinion about your financial situation.