When should people in Ontario consider a private mortgage?

A private mortgage is when a mortgage loan is not lent out by a financial institution such as a bank or a credit union, but instead through a mortgage investment corporation or private individuals. Private mortgages fill the void for people needing mortgage financing, but are unable to get a loan from financial institutions.

The reason for needing to turn to a private lender can range from a variety of reasons, including having a bad credit score, low income, needing to borrow money to do a renovation, or wanting to consolidate debts. However, since private mortgages have much higher interest rates than financial institutions like a bank or credit union, getting a private mortgage loan is best used as a short-term solution.

Usually private mortgage loans are for a 6 month or 1 year term, however some may be for as long as 3 years. Private lenders may charge upwards of 5% in interest, and some lenders may even charge interest rates over 10% depending on the situation. However, in special scenarios the high rate of interest may still be worth it, such as:

Reconstructing an Old Property

Private mortgage loans can help cover the costs of reconstructing and renovating an old property if you do not have other forms of financing to draw from. A private mortgage loan can help you complete a project and give you the time and ability to refinance the completed property with a mortgage from a financial institution with a lower interest rate. The reason why reconstructing older properties especially may be a good option for a private mortgage is because of the added risk involved in a large-scale renovation project, which may make traditional lenders less likely to lend in these situations.

As well, if you are reconstructing a property with the goal of selling it later on, the interest rate you may pay could be less of a concern than the amount of funding and flexibility that a private mortgage may offer over a traditional lender in the short term. 

Buying Land

Most banks and credit unions are very reluctant to finance the purchase of land in Ontario, especially if the land is raw and undeveloped without any structures or road access to it. Even if a bank is willing to fund the purchase of land, you will likely need a very high down payment in order to qualify for a loan. Because Ontario private mortgage lenders are more comfortable with the risks that purchases such as a piece of land have, getting financing through these lenders may be one of your only options, and may allow you to purchase with a lower down payment.

Because of the high interest rates private mortgage lenders will offer, financing with a private mortgage for land can be a good option if you plan on developing the land further, including adding structures that you can then use to get a mortgage from a financial institution. Once you have the land purchased, you will have more financing options for the construction other than just a private mortgage, which may include a construction loan or a bridge loan. This can help you to fund your project costs, while also potentially being able to refinance with a lower long-term interest rate at a financial institution once the land is developed.

Needing Quick Access to Funds

Considering that private mortgages are good options for filling the need for quick funds in tough scenarios, they can be very helpful to fill a short term void for buyers. This includes purchasing a home without the ability to get financing from a traditional lender, with the goal of switching over to a traditional lender over the long term as your situation improves. Another scenario where a private mortgage may help is in providing short term financing quickly if you need time to sell your home instead of having a bank foreclose on it.

As well, COVID-19 has created a need for private lenders for many self-employed people and business owners looking to purchase a property. Since a lot of businesses struggled during the pandemic, it may make these people turn to private lenders in the short term as the amount of income their businesses earned fell drastically. Since many traditional lenders will look at a business owner’s income over multiple years, it may make it hard to get a traditional mortgage until the income during COVID-19 is no longer considered when applying for a traditional self-employed mortgage.

In Conclusion

The very high interest rates that private mortgage lenders will charge you will mean that holding a private mortgage over a long time period may not be feasible. However, private mortgage loans can help you to finance projects or cover cash shortfalls in scenarios where traditional lenders are not able to help with, making them an important option to be aware of.

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