Exploring All Options: When might a private mortgage be right for you?

Life can be expensive. Home ownership in a large city such as Toronto often requires years of diligent savings, almost every penny of which goes towards a downpayment on a property that still may not be your ‘dream home’ at first sight. Once you finally have possession of the home, it may need tens of thousands of dollars in renovations or remodels to make it more desirable for long-term living. These costs also do not include other regular steep expenses, such as unexpected car repairs, veterinary bills, dental expenses, and family milestones, all of which may take a hit to an already overstretched budget. 

For homeowners in a financial ‘tight spot,’ especially where their circumstances will not permit borrowing more money from a Schedule I bank or credit union (which is similarly regulated), a private mortgage may be the right answer. In private mortgages, lending corporations (or occasionally wealthy individuals) will offer to finance a higher risk loan that major banks or credit unions would not. These often include second mortgages on a property (such as for renovations, repairs, or debt consolidation), mortgages for purchasers with unstable income or poor credit, or mortgages for purchasers looking to engage in complex investment transactions that banks are not keen to finance. 

While these private lenders step in to fill the void, their loans often come with rates and conditions not seen from banks. In a private mortgage, the borrower is not paying any amount down on principal, they are simply paying interest, and so higher interest rates are what makes investing in private mortgages fruitful for lenders. Private lenders are often less concerned with a borrower’s credit history, so long as they have sufficient funds for borrowers, the higher interest rates may mean that private mortgages are a temporary solution (rather than a long-term financing plan) in order to improve one’s financial health. 

So, is the risk of borrowing really worth the reward, for borrowers and for lenders? Are you a prime candidate for taking on a private mortgage? If you are, is borrowing privately the best way forward? 

There are many instances where a private mortgage may be the right answer. For borrowers looking to consolidate their debt, or improve their credit by paying off high-interest bank or government loans, private mortgages might be a workable solution. They can also be a useful financial vehicle where they function as a second mortgage to then help refinance a primary mortgage, which places borrowers in a more favourable financial position. Those private mortgages can also help bring an older home out of disrepair, or help pay off high CRA bills which can have significant consequences if not repaid quickly. 

Unlike standard charge terms from a bank or credit union, where mortgages operate under a very predictable set of rules, private mortgage terms are negotiated completely between the borrower and the lender. It is crucial that the borrower fully understand the terms of any deals made, as they will often differ from any traditional mortgages that they have been involved with in the past. While the paperwork obligations for the borrower are often fewer, legal and administrative work to prepare the mortgage may be slightly more involved as each party’s representatives negotiate the details of the agreement. 

In some instances, a private mortgage is going to be the appropriate step for home buyers or existing home owners. Previous credit trouble should not preclude individuals from ever purchasing a home, and important living expenses should not be ignored because of steep housing prices. For self-employed individuals, private mortgages may be the best avenue to make a purchase without having to go through the complexities of verifying their income. 

Today, private lending is not just an option for those otherwise deemed ‘higher-risk.’ Even borrowers in good financial standing may turn to a private mortgage as a financial vehicle to favourably reorganize their debts. Yet the risks of entering into a private mortgage are high, and anyone considering doing so should consult with a skilled lawyer to discuss their options. At Sari Rose Law, we review private mortgages with a fine-toothed comb, and advise our clients so that they fully and completely understand the terms of the deal they are about to enter into. We understand complicated financial situations, and will work with you and your financial advisors to help put you in the best position moving forward. 

Contact us today to discuss whether a private mortgage is right for you.