Most people in Mississauga, given the choice would likely choose a traditional mortgage over a private mortgage. But still there are some very good reasons as to why one might opt for a private mortgage. In this article, we will discuss the reasons why one might choose a private mortgage.
What is a private mortgage?
Let’s start by defining what we mean by a private mortgage. A private mortgage is a mortgage offered by a private company or individual. In the case where the mortgage is being offered by a company, it is usually offered as an investment – the company earns interest from the mortgage borrower.
In the case of a private mortgage that is offered by an individual, it too can be as an investment. But it can also be offered as a favour. Some private mortgages are offered by friends of family members of the borrower in order to help them out and these usually have very low interest rates.
No matter what type of private mortgage you choose however, you should always work with a qualified mortgage broker to make sure that everything is done properly and legally.
Reasons to choose a private mortgage.
There are several reasons why a homeowner might opt for a private mortgage. These include:
- Poor credit – this may be the most common reason for choosing a private mortgage. If you have poor credit, you won’t be able to get a traditional mortgage from a bank, but since private lenders are able to look at the bigger picture, you are more likely to get approved for a private mortgage.
- Self-employed – Sometimes people who are self-employed have a difficult time proving their income. They may have a lot of tax write-offs that affect they way their revenue looks on paper and this can make it difficult for them to get approved for a conventional mortgage.
- Unconventional property – Most A lenders won’t grant you a mortgage on an unconventional property such as a tiny house. If you are looking to purchase a home that is a little out of the ordinary, you may need to turn to a private lender.
- Short-term – Most traditional mortgages are for terms of five years. But what if you want only a very short-term mortgage – say, one year? In this case, it might be your best bet to opt for a private mortgage.
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If you are considering a private mortgage in Mississauga, we can help. Contact us today to learn more.
Pros and Cons of Private Mortgage Loans
Private mortgage loans are often presented as an option to home buyers who cannot qualify for a mortgage with other more traditional types of lenders. Some people consider private mortgage loans to be a “last resort” but the fact is, they are an important mortgage tool and in the right circumstances, you may want to consider getting a private mortgage loan.
Here are some of the pros and cons of getting a private mortgage loan.
Pro: Easier to qualify for.
This is one of the biggest pros of a private mortgage loan. To get a mortgage with a federally regulated lender in Canada (such as a bank) you will need to pass the mortgage stress test. This can dramatically reduce the amount of loan that you qualify for or in some cases it might mean that you don’t qualify at all. With a private mortgage, though, you don’t have to worry about the mortgage stress test, and you don’t have to have a perfect credit score either. This makes private mortgage loans a good option for people that don’t qualify with other lenders.
Con: The interest rate is higher.
This is perhaps the biggest negative of a private mortgage loan. Since the reason you are looking at a private mortgage is likely because you don’t qualify with other lenders, your lender will likely consider you a bigger risk. To offset this risk, they are going to charge a higher level of interest.
Pro: Good for Flippers
If you are buying a home to fix up and re-sell, you may not want to get a traditional mortgage with a long amortization period. Private mortgages can be great for flippers who only want a mortgage for a short period of time.
Con: Less time to Pay Back
Since private mortgage loans are generally for very short periods of time (usually one year, or occasionally two), this could be considered a drawback if you need more time to pay off the loan. Private lenders are usually looking to make a quick profit and they are not set up to service long-term loans.
If you are considering a private mortgage, we would be happy to help. Contact us today to speak with one of our professional mortgage brokers.
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