A private mortgage is one that is offered by an individual or a company who is not a mainstream or alternative institutional lender. A private lender is someone who is willing to lend money out to borrowers who have equity in their property, need financing for a short term (usually 1-3 years), and do not qualify for a mortgage by other means.
A private mortgage can be a first mortgage, that is, you have no other mortgages on your property. Or, it can be a mortgage in second or third position, that is, you do have other mortgages on the property and they are prioritized ahead of this mortgage.
How high, percentage-wise, can a private mortgage Toronto go? As at the time of writing this, you can get private mortgage money in large urban areas for up to 85% of the value of your property. In some cases, if you are getting a private mortgage in highly marketable areas of the GTA, you may get up to 90% of the value of the property.
When a private mortgage might make sense:
- You want to purchase raw land or a unique property that institutional lenders won’t touch because it’s outside of their lending criteria
- You’re interested in buying a “flip” property or a home that is in major disrepair, and you need financing to fund your renovation
- You’ve recently been laid off or have lost your job for another reason, and you need a mortgage to tide you over while you’re job hunting
- You need to access equity in your home but the penalty to break your current mortgage is too high
- You have credit issues such as bankruptcy or consumer proposal, that prevent you from getting a mortgage for the full amount that you need from an institutional lender, and you want a “top-up”
- You need to consolidate high interest debt, but due to bruised credit, you have been turned down for refinancing
- A divorce, illness or some other life changing event has a major negative impact on your credit rating, and you need mortgage financing until you get back on your feet
- You need to take out equity from your property to get you back into good standing with an existing mortgage that is in arrears, power of sale or foreclosure
- If you’re intending to purchase a new home, you have a sizeable down payment – ideally at least 15% of the property value
- If you have an existing property, you also have a small enough mortgage that leaves you with a fair amount of equity in your property – ideally you want the total of your existing mortgages, plus this new one, to be 85% of your property value, or less
Private mortgage costs
If you’re borrowing privately, there will be some costs you’ll need to cover.
First, you’ll be required to pay for a property appraisal through an appraiser that is approved by the lender. Remember, the lender needs assurance that they are lending against a property that is worth enough to ensure they are financially protected. In Toronto and the GTA, you can usually expect an appraisal to cost $300-500 (more, if it’s a rush), and you are responsible to cover the cost at the time the appraisal is done. Don’t pay for an appraisal until you have a lender who’s agreed to finance you; they will likely have someone they prefer to use.
Payments on a private mortgage are usually “interest only” payments, which is one of the reasons this may be a good option for someone with temporary cash flow issues, or an investor. The interest rates are typically higher than with a mortgage from other sources. The rate is set case-by-case, and is based on the overall ‘story’. The lower your “loan to value“, the better the mortgage position (a first mortgage being better than a third mortgage), and the better your current credit situation (especially if you’ve kept your first mortgage in good standing), the better your rate is likely to be.
If a mortgage broker is arranging your private mortgage for you, you can expect to pay a broker fee, since in this instance the lender does not compensate the mortgage broker for their work. Typically this is 1-2%, depending on how complicated the financing is. A minimum charge may apply, so be sure to ask. A lender fee may also be charged. If applicable, this can be up to 1-2%. These fees are deducted from the mortgage money advanced at the time of closing. You only pay these fees if you get your money. A responsible mortgage professional will advise you of all these costs UP FRONT, so that there are no surprises. This way, you can make your decision as to whether to proceed, with all the facts in front of you.
And finally, you, the borrower, are responsible for paying the legal fees for both yourself and for the lender. If your private mortgage amount is less than $50,000, you can use the same lawyer as the lender, so that reduces your legal fees somewhat, but you always have the option to use your own lawyer. And if the private mortgage is larger than $50,000, you must use your own lawyer in order to get independent advice.
Final thoughts and knowing your exit strategy
There is no question a private mortgage is more costly than one with a mainstream lender or a B lender. Even so, it may be a valuable option for someone in the scenarios described above. A private mortgage should be considered a “stepping stone” which enables you to deal with the situation that is currently creating challenges for you, and to prevent more costly problems in the future.
If you’re currently credit challenged, getting back on track can enable you to qualify for mainstream or alternative financing in a year or two, and to pay out the private mortgage, if you take the proper steps to improve your credit. Or, you may decide that if nothing changes, you will sell your property, pay off your mortgage(s) including the private, and bank your remaining equity. And if you’re doing a property flip, having a strong game plan to finish the work and get the property sold should enable you to pay out the private lender and profit from your investment.
If you would like to chat about your options, please don’t hesitate to get in touch for a free, no obligation evaluation of your financial situation