Some private lenders require amortized payments (25 to 40 years), while most are content to receive interest-only payments. This is good for optimizing your cash flow, but the downside is your outstanding private mortgage balance will remain constant over the term because you are not paying down the principal mortgage amount, just the accrued interest. The important thing is that you (the borrower) may have more choices with a private lender than with a traditional lender.
In the Private Lending business, most privates are second mortgages, and at times a first. There are many lender choices but what’s important is which mortgage fits best with each borrower?
Experienced brokers typically develop a small network of their go-to lenders. These are lenders we trust and have built relationships with, based on winning mortgage solutions that are fair for borrowers.
Reputable lenders have thought through all critical aspects of their businesses, including underwriting, legal, administration and customer service. This empowers them to have well-defined processes in place that make them a natural choice for partnering purposes.
Lender pricing is often matrix driven, depending mainly on location, loan to value, applicant credit quality and the property itself.
Private mortgages are typically not as tech-savvy as bank options. For instance, you are not likely to have online access to your mortgage the way you would with a traditional mortgage lender. And you may even have to provide post-dated cheques for your mortgage payments.
You will find some lenders can be extremely creative in terms of structuring a mortgage that suits you. For example, they may;
- Give you an odd-looking maturity date to exactly match your current first mortgage. (eg, 16 months and 4 days).
- Allow you to prepay part or all of your monthly payment so that your cash flow matches your comfort level.
- Enable the mortgage to become open – as early as two, three or six months after it commences.
There are often specific problems that need to be remedied by a private mortgage over a one-year or two-year term. In other words, what led you to where you are today? This may include:
Paying off high-interest unsecured debt such as credit cards or CRA debt.
Consolidating several debts into one single, lower monthly payment to improve cash flow.
Paying off and completing a consumer proposal early to speed up the restoration of your personal credit history.
Buying a new home before your existing property has been successfully sold.
You may only need a fix for a very short time, a few months or even less.
Ideally, yes. The whole intention of placing you in a temporary private mortgage solution is to address whatever issue(s) brought you to your current situation. If a private mortgage will not improve your finances, it is important to analyse your goals vs realities. You may want to seriously consider selling your property if it will continue to pose a burden on your cashflow for years to come.
It is imperative you avoid missing payments for any reason. It’s not uncommon to incur a $300 non-sufficient funds (NFS) charge if you do, in addition to whatever your own bank charges you. Missing payments will also hurt your chances for renewal.
And if you run into serious problems and find you cannot make the payments, deal with the problem as quickly as you can. It may even be wise to list your home for sale immediately to avoid expensive legal processes and extreme costs.
You are now in a world of much higher interest rates and high fee structures. If you have never needed a private mortgage before, this can be quite a shock. Most of the time these fees are paid for from the mortgage proceeds, not from your own pocket.
When you arrange a mortgage with an A-lender, your typical out of pocket costs are for the appraisal, and legal fees and disbursements, including title insurance.
With private mortgages on the other hand, there are more and larger fees to set up the mortgage. You should also expect to pay a brokerage fee (as your mortgage broker is not typically paid by the lender as they would be with a mortgage from an A-lender) and a one-time fee to the lender. This lender fee may be called a placement fee, an administration fee, a setup fee or a commitment fee or some other similar sounding name. Some additionally charge an application fee.
In most cases, you will also need Independent Legal Representation (ILR) – that is, your own lawyer. You will negotiate the cost for this service yourself. Your lawyer receives instructions from the lender’s lawyer and in many cases is expected to do a fair bit of heavy lifting (much of the legal work) to get the mortgage funded.
All these costs should be clearly disclosed to you in a disclosure document before you sign a mortgage commitment. It’s the law. And in fact, reputable mortgage brokers will provide you estimates well in advance, to avoid last-minute surprises.
A private mortgage is meant to solve a problem, and, in most cases, should not be a long-term solution. It should be the first step in the journey back to traditional lenders as soon as possible.
When you finish your private mortgage and are ready to pay it out, be sure it is discharged properly by a lawyer. You can expect to pay legal fees and disbursements, as well as lender statement preparation and discharge fees.
Debt consolidation is the process of combining several debts into one, usually with a lower interest rate. This lets you pay off the high-interest debt so more of your payment goes toward paying down the principal.
For the last few years, mortgage rates have been historically low, with lenders offering rates in the 2 percent range. Compare that to credit cards which typically range anywhere from 18 percent to 25 percent.
It’s clear how consolidating into a mortgage can save you money.
You could also lower your total monthly payment by making a single payment on the mortgage rather than one for each debt. This can free up cash flow for paying expenses, monthly savings, or investing.
Another side-effect of consolidating your debt is that it can help improve your credit score. Mortgage balances are weighted differently in the credit score calculation so moving balances from credit cards and other high-interest debts can help.
When you consolidate using a mortgage the lender adds the amount of the debts you’re consolidating to the balance of your mortgage. Those funds are then used to pay off the various debts.
In most cases, the lender will set a condition in the mortgage requiring your lawyer to pay off the creditors on your behalf. If they provided the funds directly to you, there’s a chance you could spend it on something else and not pay off the debt it’s intended for.
That would leave you with a higher mortgage balance as well as all the existing debt. This could impact your ability to pay and increases the lender’s risk.
What is the difference between secured and unsecured debt?
When a debt is secured, it means something of value is being used as collateral for the loan. In the case of a mortgage, your home is the collateral. If you don’t make the mortgage payments, the bank can foreclose on your home to recover their money.
An unsecured debt doesn’t require any kind of collateral. The most common example is credit card debt. In most cases, nothing is securing the money you owe on your card. The credit card company lets you “borrow” money based on how much of a risk they think there is that you won’t pay them back.
If you don’t pay the balance owing, they can take steps to collect that money but they can’t repossess something you own or foreclose on your home.