How do Private Mortgages Work?
When shopping for a home chances are you’re going to need a mortgage because very few
people can buy a home without financing. In order to get a mortgage you will be working with a
lender of some kind – a bank, a financial institution or even a mortgage broker – and they will be
looking at your credit history to determine how much house you can afford and whether you’re
likely to stay on top of your payments. If you’ve been looking at mortgages lately, you may have
heard the term private mortgage. If you’re wondering how this kind of mortgage differs from
conventional or insured mortgages, then here’s what you need to know about private
What is a private mortgage?
Within Canada there are 5 major banks that are backed by the federal government, and they
have very specific rules and regulations they have to follow when lending consumers money. A
private mortgage will come from a lender – it could be another financial institution – where the
money being given is not backed or insured so the lender is at liberty to make their own rules
about who they give to.
With this in mind, private lenders can lend to individuals whose credit history may be poor or
those without a credit history. They can also provide mortgages for those who may have a
higher debt obligation, and are considered a high risk. These mortgages are available to those
that traditional banks may not consider lending to.
Who is suitable for a private mortgage?
Private mortgages are not meant for everyone, in every situation as the terms are not exactly
the same as traditional mortgages and private lenders can (for the most part) dictate their own
terms. Private mortgages are usually seen a short term solution, for 1 – 3 years, as a way to
build your credit and prove you are reliable to make payments.
Private mortgages are often recommended if you’re in any of the following categories
- Poor, or non-existent, credit history
- Self-employed, or with unsteady/inconsistent income
- Emergency funding if you’re facing foreclosure
- Second mortgages or investment properties
What are the benefits of a private mortgage?
The traditional banks in Canada are normally focused on your ability to service your debt, so
they worry about how much you want to borrow and the likelihood you’re going to pay it back.
Private lenders are quite often more focused on the piece of property you’re looking for
purchase, and its value.
Private lenders often focus on confirming they would be able to sell your property in the event
of foreclosure, even if you don’t want to think of that happening. They will also look at factors
like your income and ability to repay the money you’re borrowing, too.
Overall, private mortgages are a viable option for anyone who may not qualify for a mortgage at
a major bank but still wants to purchase a home. They often do come with higher interest rates
because the lender is taking a large risk by giving you this much money, and so the interest rates
compensate for the risk the lender is taking on you.