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A private mortgage is a short-term, interest-only loan to buy property. Private mortgages are offered by independent individuals or institutions, so it may be easier to qualify for one.
The process of getting a private mortgage in Canada can be much faster and easier than qualifying for a traditional mortgage. But know that those benefits come with higher interest rates, fees and potentially more risk.
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Private mortgage: Definition, pros and cons
A private mortgage is a loan offered by an individual or institution to prospective homebuyers who are unable to secure a traditional loan from a financial institution, like a bank. These loans are similar to subprime mortgages.
Private mortgage pros
- Suitable for people with poor or little credit history.
- A faster approval process.
- Open to people who don’t have traditional sources of income.
Private mortgage cons
- Higher interest rates.
- Additional fees for setup and commissions.
- Interest-only payments don’t help you pay down your mortgage.
- Private lenders are not licensed, so you can’t be sure if they have the same education, experience and suitability requirements as licensed mortgage professionals.
- Harsh implications if you get behind on payments. Private mortgage lenders will foreclose on a home more quickly than a bank.
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When is it a good idea to get a private mortgage?
Private mortgages might be a good option — despite higher fees and rates — if:
- You have poor credit history and traditional lenders won’t approve you for a mortgage, or for enough funds to buy a property in your area.
- You need the money quickly and don’t have time to go through a traditional lender’s approval process.
- The property you want to purchase is unconventional, so a traditional lender will not finance it. For example, perhaps you have your eye on a fixer-upper, inherited a home in disrepair and need help with construction costs. Or maybe you want to buy a commercial property, vacant land or a home in a rural area — a bank might be wary of your application.
- You just need a short-term loan until you’re in a better position to secure funding from a traditional lender.
- You are unable to confirm your income to meet the requirements for a traditional mortgage.
- You’re a newcomer to Canada who can’t fulfill the standards of traditional lenders. Foreign income, foreign credit history and a short Canadian employment history might make it difficult to be approved by traditional lenders.
- You’re self-employed and have irregular income.
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What terms are available with a private mortgage?
Private loans are often short-term, with typical amortization periods lasting six months to three years. It’s thought that, after making on-time payments over this term, the borrower will be in a better position to apply for a mortgage from a traditional lender.
Do private mortgages have good rates?
The interest rates offered by private mortgage lenders tend to be significantly higher than those offered by traditional lenders, mainly because the payments you’ll make on this type of loan are interest-only. With an interest-only mortgage, none of your payment goes towards the principal, so the total amount owed does not get smaller over time, as it would with a typical mortgage.
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How to get a private mortgage
Private mortgages are offered by individuals, syndicates and mortgage investment corporations. An experienced mortgage broker may be able to put you in touch with a reputable private lender, or you can search for one yourself.
While getting a private mortgage is generally faster and easier than qualifying for a mortgage with a bank, you’ll still have to meet some eligibility requirements. To qualify for a private mortgage, you need to have:
- Proof of income: You’ll need to demonstrate that you have the income necessary to make mortgage payments. This can be tricky if you’re self-employed, and you may be required to provide extra documents.
- Down payment: Usually, you’ll need a minimum down payment of 15% of the purchase price to get a private mortgage.
- A sellable property: If the borrower defaults on payments, the lender will want to take possession of and even sell the property to recoup their investment.
Alternatives to private mortgages
If you don’t qualify for a traditional mortgage, and you can’t get or don’t want a private mortgage, consider these alternatives.
Get a co-signer
Friends or family members who co-sign a mortgage add the strength of their financial profile while also assuming responsibility for payments if you fall behind. Co-signers can make it possible to get approved for a traditional mortgage if your individual income and credit score don’t meet lender requirements.
Rent-to-own
These types of programs are structured as a long lease with an option to buy the property at the end of a specified term. The idea is that you can move into the home immediately, but you have a longer time to save up and get into a better financial position to apply for a mortgage at the end of the lease.
Multiple collateral mortgages
These require a second property to secure the mortgage, typically the home of a friend or family member. Having the extra collateral will make it easier for you to qualify for a loan, but both parties are now responsible for it. If either party defaults, both homes will be at risk, so carefully evaluate other options before considering this one.
» MORE: What is a collateral mortgage?
Seller financing
This option isn’t common, but you may be able to negotiate flexible terms with the seller. The most popular example of seller financing is a Vendor Take Back (VTB) mortgage, in which a loan is held for part of the sale price. However, the interest rate may be higher than for a traditional mortgage, and you’ll need to find a mortgage lender that will allow this type of deal.
Wait until you can qualify
Sometimes the best thing to do is pause your house hunt. Take the time to get your financial health in order, pay off more of your debt, build a better credit score and save up a larger down payment. When your finances are in better shape, you may be able to qualify for a mortgage with a traditional lender.
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