When you are in need of a loan but no banks and financial institutions are willing to lend you any money, then a private mortgage is often the only option left for you. It usually comes with a high interest rate plus a processing fee, which makes it more expensive than traditional mortgages. However, many borrowers in Canada like it because it can be a lifesaver in times of acute financial difficulty. For lenders, it provides an opportunity to make a good profit in a short time.
The Main Reasons People get Private Mortgages are:
- Simple and easy: The application process is simple and the loan is easier to get.
- No credit score required: The lenders are not interested in seeing your credit score, which is why it is also often called bad credit mortgage.
- Less processing time: The processing time is usually less than a week compared to several weeks for traditional mortgages.
As long as they are satisfied there is adequate equity in your home, which will be your collateral, they will be happy to lend you the money you need. However, the lenders want to make sure that your property is marketable in the case of a foreclosure.
Because private mortgages are expensive, it is not for everyone and you shouldn’t consider it unless you can find no other sources of funding.
Here is a Breakdown of Private Mortgage Costs in Canada:
- Legal fees: The lenders require you to bear the cost of the legal services to draft and close the mortgage. For a typical mortgage, the legal fee is around $1,500.
- Appraisal fees: Your property may need to be appraised to calculate the amount of a loan you can get. The lenders usually require you to bear the cost of the appraisal, which typically cost about $350.
- Property inspection fees: The lenders usually want to have your property inspected by a home inspector and require you to bear the cost.
- Brokerage fees: If you use the services of a mortgage broker, then you have to pay his fees. Using a broker is often a good idea because experienced brokers have a lot of clout and they can often find a lender willing to lower the interest rate.
- Interest rates: Since the lenders are taking a high risk by providing you with the mortgage, the interest rates are higher than that of traditional mortgages. The actual rate is determined by the type and location of the property being purchased, down payment, loan-to-value, ratios, net worth and your income.
Despite the higher cost, a private mortgage is popular in Canada and thousands of people get them every year. It is especially attractive to people who have a poor credit rating, are self-employed, don’t have a regular income or are interested to invest in high-risk high-gain properties. It provides these people with a quick and easy fix to their problems.
The federal government of Canada has made several changes to the rules governing federally regulated mortgages since 2008. These new rules, which are designed to protect Canada’s housing market from the type of housing meltdown that happened in the US, have placed more stringent demands on borrowers.
The New Rules include the following:
- The maximum amortization period has been reduced from 40 years to 25 years. This means that your monthly repayment will be higher.
- The maximum purchase price for a property that will be insured is 1 million dollars
- That maximum total debt service ratio is maxed at 44%, and the gross debt service ratio is maxed at 39%
- The maximum limit for home refinancing has been reduced from 95 percent to 80 percent.
The shorter amortization periods and the maximum debt service requirements have made it harder for people to qualify for traditional mortgages. A lot of Canadians who would have easily qualified before the rule changed do not qualify anymore. Therefore, an increasing number of people who are in need of money are opting for private mortgages.
Another reason private mortgages are becoming popular is that the interest rates are now at the lowest they have ever been. They may not remain this low for much longer, since the Canadian economy was not hit as hard as the U.S. Although unemployment is above 8 percent, export is down because of the strong Canadian dollar, and home prices are still high despite the slowdown in sales.
All of the factors combined point in one direction: private mortgage is trending upwards. It is a good time for borrowers because the interest is low (compared to the interest rates in the past) and it’s a good time for investors to invest their money in private mortgages because there are many more borrowers. The popularity of private mortgages will not wane as long as the traditional mortgages are out of reach of a significant number of Canadians.
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Luther Murley is a graduate of Economics from Toronto, Canada. He specializes in loan processing and has been a regular contributor to some popular magazines that deals with finance & mortgage!