5 Things to keep in mind when considering a private mortgage
With many people priced out of the housing market in the GTA and stricter mortgage rules right across Canada, private lending is becoming more and more popular among people looking for homes. The Financial Services Regulatory Authority of Ontario says the value of private mortgages has jumped from $13 billion in 2019 to $22.4 billion in 2021 and the number of mortgages rose from 30,435 in 2019 to 36,568 in 2021.
We’ve been lending for over a decade in the private lending space and notice every time rules get tighter, demand for private mortgages surge. When the bank makes things harder, this doesn’t mean people are going to sit down and wait for the bank to change the rules in their favor. Home buyers still need a home. Investors are still looking for valuable investments. Hundreds of thousands of people are still immigrating to Canada every year and causing a surge of demand in the middle of a shortage of supply. There is much caution urged around private mortgages from experts and the news media, and rightfully so. With that caution in mind, here are 5 things to keep in mind in the event you find yourself considering a private mortgage.
- Equity matters! Private first mortgages will typically lend up to 75% of your house value (for a quick equity assessment click here). There are lenders who will lend up to 90%, but this is generally a combination of first and second mortgages. This type of borrowing is not recommended for first-time home buyers with less than 20% down.
- Plan your exit strategy in advance… Generally, private mortgages are 1-year terms and interest only. This means you are not paying down any principal on your loan, and every year it will come up for renewal. Within a year or two, you want to be able to transition into a more traditional loan that is amortized and at a lower rate. (to book a strategy call, click here)
- Know your numbers on the way in… Borrowing privately, is not like borrowing through banks. There are lender fees, broker fees, and additional legal costs. Some agents will ad admin fees, last minute fees. It’s important to have an idea of the whole breakdown in advance. (Click here to see an example of a private mortgage scenario). NSF penalties for missed payments can range from $150 to $350, this is important to keep in mind when deciding to take that trip to Tahoe or make your mortgage payment. Knowing is half the battle, and will keep you from getting taken advantage of, and also a last-minute scrabble because you didn’t have all the information.
- Know your numbers on the way out… Are there renewal fees if you decide to stay another year? Are there additional costs added to the principal when I payout the mortgage? Can I pay early, what would the penalty look like? Asking these questions before you borrow will help you plan accordingly, and avoid any surprises when payout out the mortgage. (Click here to see an example of a payout)
- Mortgages Agents/Brokers are not permitted to take deposits for mortgages less than $400,000. Retainers may be requested from lawyers, prior to commencing work to close your fully approved mortgage. Be cautious when deposits are requested up front, especially if they’ve not even provided a commitment.
If you are considering a private mortgage, or perhaps already have one and know you’re going to need to pay it out soon, we’d love to book a call with you to explore options that may be available to you. Click here to book a call!
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