Private mortgages and refinancing are financing options at the time of buying commercial or residential property. They can be considered for financing many things such as funding your or your children’s education or a home renovation.
What is Private Lender Mortgage?
Private lender financing in Canada is growing exponentially and is now one of the most preferred options for purchasers looking to finance their needs. Many times, a simple mortgage may not suit your requirements, and you may need a mortgage option customized for you and your circumstances. It best suits purchaser profiles as noted below:
- Self-Employed persons
- Financing studios or micro-condos that are 600sqft or less
- Investors who are foreign nationals
- Non-residents of Canada
- Purchasers who are credit challenged
- Persons with outstanding arrears payable to CRA
- Persons with outstanding property tax payable
- People undergoing foreclosure
- Persons needing construction financing and commercial loans
- Persons needing open short-term financing with no penalties
What is Refinancing of a property?
Refinancing of a home or an investment property can be done. It essentially replaces an existing loan with a new loan from another lender. The interest rate and terms and conditions of the new loan are different from the previous one. Your Commercial Real Estate Lawyer helps you to get in touch with leading financial institutions in Canada such as banks, credit unions and secondary market lenders.
A typical refinancing process can be challenging, but with support from a trusted Real Estate Lawyer, it can be navigated in a better and more effective manner. The Lawyer can also assist you in ensuring accurate documentation, negotiating for a better loan with favorable terms and conditions and discharging existing mortgages as and when needed.
Why opt for a Private Mortgage?
Many persons prefer private mortgages over other forms of credit due to certain reasons such as lack of credit history, or if they are credit challenged, retired or self-employed.
Persons having high-risk properties also opt for private financing as they have been turned down by the banks and other traditional lenders. Few persons may need gap loans to fund their needs between the what they have and what they need. You may also want a second mortgage to fund the monthly or annual bills. Private financing is perfect for all the circumstances noted above.
The private lenders typically understand your situation better, and you get the loan at your preferred price. Options of many private lenders are also present which helps in getting competitive rates.
What are the costs of a Private Mortgage Loan?
In a private mortgage loan, you are responsible for paying the mortgage broker’s fee directly. If you take a loan from a conventional lender, the lender pays the broker. Set up costs are also present in a private loan which are normally calculated as a percentage of the loan amount. The amount of the mortgage can finance all the fees associated with the financing.
Private mortgage lenders specialize in certain categories within lending such as residential or commercial, debt consolidation and home renovation. Few lenders prefer urban areas due to higher values of real estate while others may prefer certain geographical areas.
What are the typical processing times for a private loan?
A private loan normally has a processing time of 1-3 weeks including the release of funds for the applicant. You can transfer to a private lender with a lesser lending criterion due to the higher risk fee and interest they charge. Private lenders have less stricter guidelines on other factors than prime or conventional lenders.
What factors are considered by a private lender before disbursing a private loan?
Type & Value of Property
The type and value of the property being financed are some of the most important considerations for a private lender to finance the loan. A property appraisal is done where the condition of the property must be good to be successfully approved for a private mortgage.
Persons with lower credit scores are considered to be risky, and lenders make sure they can recoup their investment in any default scenarios.
Confirmation and non-confirmable income are two categories in which the persons applying for a private loan are classified into to determine income. Confirmable income can be proved through Notice of Assessment and is the preferred option for lenders. Non-confirmable income is an estimated value calculated from the average incomes in that particular occupation. This option is less preferred by lenders and mainly used for self-employed individuals and commission income employees.
85% is typically the loan to value percentage for purchasing property while 15% is the normal percentage payable as down payment when you take a private mortgage. Any higher down payments are preferred and makes it clear to the lenders that you have a lot at stake in the property.
In refinancing, 85% is typically allowed as a maximum loan to value. There is no minimum equity stake requirement needed in the property for private mortgages.
Can you refinance your property with second mortgage if you have a collateral charged mortgage?
If you have a collateral mortgage with a bank, all your equity is pledged to the bank. In this case, no other lender can refinance your property by advancing a second mortgage.
What factors should be noted before you finalize a Private Mortgage or Refinance Your Property?
Once you get the right private lender, keep a check on the below points:
Take your time in getting into the deal and study the terms carefully before signing the contract. You can even ask for references and make an informed decision. It is recommended to get your commercial real estate lawyer to review all the documents before you sign them.
It is vital to plan your exit strategy as private lending contracts are usually short term with an average term of 1-2 years. Your real estate lawyer will suggest you to use the private lending options as a bridge to move on to traditional lenders offering lower interest rates.
Understanding the costs structure and other terms is essential before you sign the contract. The private lender will have their fees for the service rendered. The real estate lawyer will charge legal fees and if you have a mortgage broker involved, you will be paying for their broker fee too.
Review the exit fees and understand the prepayment penalties if you happen to close the contract before time.