When does a private mortgage make sense?
If you are having difficulty in qualifying for a traditional mortgage, getting a private mortgage may be a solution to help you get into or stay in your home. In the past private mortgages have accounted for approximately 4-5% of all Canadian mortgages, however with stricter lending rules now in effect, that number is expected to increase.
Private mortgage are typically interest only loans, but because the lender is taking on more risk interest rates can be quite a bit higher (ranging from 10-18%). For this reason, they are meant to be short term solutions. Borrowers should plan on taking on a private mortgage for no more than one to three years while they pay off debt and build up their credit.
Situations where a private mortgage makes sense include:
- When the borrower doesn’t have enough credit to get a mortgage through a traditional lender.
- When the borrower is self-employed and not able to verify their income.
- Non-residents of Canada.
- When the borrower is at risk of foreclosure or is in arrears for their property or income tax.
- When the mortgage is for a mobile home or for a micro-condo (under 600 square feet). Typically these cannot be financed through a bank.
- When it is for a second mortgage or mortgage on an investment property.
Private mortgages can be beneficial to those with poor credit because they typically require much less documentation than traditional mortgages and the approval process tends to be more flexible. Provided the borrower has a large enough down payment or enough equity in their property, they can usually qualify.
When a private mortgage may not be the answer
As noted before, private mortgages come with risks and are meant to be short-term solutions. Before getting into a private mortgage, you should have a plan in place to build up your credit so that you will be able to switch to a conventional lender.
If you do not see yourself as having the ability to do this within the next few years, then obtaining a home loan from a private lender may not be appropriate.
If you are considering a private mortgage is it best to sit down with a qualified mortgage professional who can help you weigh the pros and cons and determine whether this option is a suitable choice for you.
For more information on private mortgages, contact Matrix Mortgage Global today at 1-800-429-0717.