Is “private lending” a good option for you?

As with everything in life, it depends. Borrowers need to have a plan, and have done their homework.

Is the loan being used to bridge the purchase of a home, and the sale of another. Is it because the borrower cannot get approved by a bank or financial institution due to a bad credit score or low income.

There are numerous other reasons to turn to a private lender, but the key to using this type of product is to fix a short term situation. 6-12-18 months, any longer, and the business case for taking out a private loan no longer makes any sense. The borrower needs to have an exit strategy, or they could run the risk of finding themselves stuck in a perpetual cycle of private loans, which can turn out to be very costly.  

Private mortgage lenders are not subject to any regulations in Canada, and as such, they can set their own fees and lending conditions:  

• A private lender will typically charge between 9 and 15% plus fees.
• Private lenders are less concerned with a person’s credit score and income; they look at the value of the property being used as collateral to secured the loan. They rarely lend more than 75% “loan to value” (LTV), which means the borrower can access up to 75% of the appraised value of their property, with the balance representing the home’s equity.
• The loan payments are interest only – the borrower pays only the interest on the loan during the term, with the principal remaining unchanged during this period.

Private lenders can be investment corporations that pool capital from investors or individuals lending their own money. Private lenders are looking to make a return on their investment through the interest paid by borrowers. The major difference is that they are not connected to a financial institution such as a bank, credit union or finance company.

Before signing a contract with a private lender, borrowers should seek the advice of a mortgage broker who can explain the “ins and outs” of private lending, the fee structure, and help devise a plan with the objective of transitioning a borrower from a private lender to an alternative or traditional lender that will charge a lower interest rate. As mentioned above, private loans are meant to be a temporary measure.

Private lending can be a terrific strategy when used properly. If you have any questions or would like more information of this product, contact us at North East Mortgages, and one of our brokers will be happy to meet with you.