What is a private mortgage in Canada?

Private mortgage in Canada is a viable option for borrowers who cannot secure traditional financing. However, they come with higher interest rates and fees, making them a more expensive option. Private mortgages in Canada are a type of alternative financing offered by private lenders who are not regulated by the government and do not follow the same strict lending criteria as traditional financial institutions. These loans are often sought by borrowers who may not qualify for a traditional mortgage due to factors such as poor credit scores or non-traditional income sources.

Who are Private Lenders of Mortgages?

Private lenders of mortgages can be individuals or companies who offer financing for various purposes such as real estate investing, business expansion, and debt consolidation. They provide more flexible lending terms and criteria compared to traditional lenders, making them an attractive option for borrowers who may not meet the strict requirements of banks, credit unions, or other financial institutions.

Types of Mortgages Offered by Private Lenders

Private lenders in Canada typically offer two types of mortgages: first mortgages and second mortgages. First mortgages are used to purchase a property and are the primary source of financing for the borrower. Second mortgages are taken out in addition to a first mortgage and are used to access additional funds for purposes like renovations or debt consolidation.

Pros and Cons of Private Mortgages

One of the main benefits of private mortgages is that they offer more flexible lending criteria, faster approval times, and higher loan-to-value ratios compared to traditional mortgages. However, private mortgages also come with higher interest rates and fees, making them more expensive. It’s essential for borrowers to carefully weigh the pros and cons before deciding to take out a private mortgage.

Qualifying for a Private Mortgage

Qualifying for a private mortgage is typically easier than qualifying for a traditional mortgage. Private lenders focus more on the value of the property being used as collateral rather than the borrower’s credit score or income. To qualify for a private mortgage, borrowers usually need to have a minimum of 25% equity in the property they are using as collateral and demonstrate the ability to repay the loan.

Finding Private Lenders of Mortgages

Private lenders can be found through mortgage brokers, real estate agents, and online platforms that specialize in connecting borrowers with private lenders. It’s crucial to do thorough research and choose a reputable lender with a successful lending track record.

Rising Popularity of Private Non-Bank Mortgages

Private non-bank mortgages are gaining popularity in Canada as they offer higher lender fees and interest-only payment options. Despite being riskier and more prone to defaults, more Canadians are taking on these loans and holding them for longer periods. However, the terms and true costs of private non-bank mortgages are often misunderstood by borrowers, and they should be used only as a short-term stop-gap solution.

Private Non-Bank Mortgages Gain Popularity in Canada

Private non-bank mortgages are becoming increasingly popular in Canada, as they offer higher lender fees and interest-only payment options. With the rising interest rates and tougher mortgage qualification rules, this trend is expected to continue or even accelerate. Despite being riskier and more prone to defaults, more Canadians are taking on these loans and holding them for longer periods.

FSRA Warns Homeowners of Misunderstood Costs

The Financial Services Regulatory Authority of Ontario (FSRA) has warned that the terms and true costs of private non-bank mortgages are often misunderstood by those who take them. Research conducted by the regulator indicates that many homeowners don’t fully appreciate the difference between these types of loans and traditional mortgages. In many cases, borrowers are only paying the interest on the loan and not actually paying off any principal.

Private Mortgages Fall into Shadow Banking

Private mortgage loans fall into the category of shadow banking, defined by the Bank of Canada as “bank-like activities that are exempt from banking regulation.” Despite being a relatively small segment of the market, private non-bank mortgages have grown significantly in Canada’s largest province, capturing 10.6 per cent of the market by 2021. The latest figures from the Canada Mortgage and Housing Corp. (CMHC) also indicate that private real estate lenders are originating a growing share of residential mortgages on a national level.

Private Mortgage Borrowers Struggle with High Rates

Private non-bank mortgages are generally short-term loans with higher interest rates, as borrowers often do not qualify with traditional lenders. While this market has attracted more borrowers, about a third of them are staying in the unregulated market for longer than they have in the past, according to Seamus Benwell, a senior economics analyst at CMHC. However, Benwell warns that it is not sustainable for most borrowers to have a loan with a private lender for a long period of time.

Private Mortgages Should be a Short-Term Solution

FSRA’s Loke warns that private mortgages should only be used as “a short-term stop gap, not a long-term solution.” Although these mortgages can be an option for some home buyers, their sometimes burdensome terms and conditions mean that they are not a suitable long-term solution. It is important for borrowers to fully understand the terms and costs of private non-bank mortgages before taking them out.

Warnings by FSRA and CMHC

The Financial Services Regulatory Authority of Ontario (FSRA) has warned that private non-bank mortgages’ terms and true costs are often misunderstood, with many borrowers only paying the interest and not the principal. These loans fall under the category of shadow banking, defined by the Bank of Canada as “bank-like activities that are exempt from banking regulation.” The Canada Mortgage and Housing Corp. (CMHC) also reports that private real estate lenders are originating a growing share of residential mortgages on a national level. However, private mortgage borrowers may struggle with high rates, and it is not sustainable for most borrowers to have a loan with a private lender for a long period of time.