There is no time like the present to consider buying property, either as a primary residence or as a secondary property, which can serve as an excellent rental investment. Few places can surpass this financially favourable reality more than the booming Toronto and GTA housing market.
Many professionals in the real estate sector had predicted a negative pandemic housing effect. With housing forecasts of up to an 18% drop in housing prices coupled with feared large-scale mortgage defaults, many had braced for a major downturn in the housing market. Thankfully, the opposite has happened in the Toronto and GTA housing sector.
Housing numbers have been impressive. The average single-detached property in Toronto has increased to an all-time high of $1.1 million in June 2021. June 2021 Housing report numbers have also indicated that the selling price of a single detached Toronto property has risen by 14.5% since this time last year, with a 6.7% increase in the first quarter of 2021.
What is a Private Mortgage?
Statistics this positive may lead many to seek secured mortgage financing to borrow against home equity or buy into the Toronto market. With excellent credit, substantial and easy-to-demonstrate yearly income in addition to other financial assets, secured mortgage financing can be obtained through the banks or credit unions/trust companies.
What if you have poor credit?
Banks (considered A lenders) and credit union/trust companies (considered B lenders) base mortgage financing approval on exemplary credit and frown upon non-traditional forms of income, including freelance, contract-based, or self-employed. There do remain private lenders (considered to be C lenders) firmly established in the Toronto area who will be able to arrange short-term, quickly negotiated private mortgage financing to those turned away from the banks.
In simple terms, a private mortgage by definition is a type of mortgage loan where money is allocated by a person or persons who are not associated with a bank or registered trust company/credit union. Those that lend out private mortgages can do so on an individual basis, as part of a group of private lenders, or indirectly by investing in a Mortgage Investment Corporation (Referred to as MICs).
Why get a mortgage with a private lender over other lenders?
If credit is an issue, you are self-employed or work on contract, it will be difficult to pass the rigorous mortgage stress tests imposed by banks. (These mortgage stress tests become even more stringent with the introduction of new mortgage rules on June 1, 2021.) Private lenders are available to provide mortgage financing. If the banks have denied a borrower/homeowner mortgage financing, then a private lender may be a good alternative. The key features of private mortgage financing include:
- A typical private mortgage has a short term, which is usually 1-3 years, compared to a term of 3-5 years that is typical for conventional mortgages. In addition, providing immediate mortgage financing can also help increase your credit score if monthly payments are made on time and in full throughout the loan.
- A private loan is negotiated quickly, usually in a matter of days in contrast to the time it would take for bank approval.
- Private mortgage financing can be a great solution for homeowners who want to access equity quickly and easily. Private mortgage lenders have the most lenient approval criteria of any kind of mortgage lender.
Some drawbacks of private mortgages include:
- Interest rates on private mortgages are higher than conventional mortgages from banks, credit unions or trust companies because there is more risk involved for the private mortgage lender.
- Privates mortgages usually have additional fees such as legal fees, lender fees and broker fees.
Approval of Private Mortgage in Toronto
Toronto property is very desirable and continues to appreciate significantly. Many private lenders are keen to lend out private mortgage financing to invest in GTA property. Moreover, as an existing Toronto homeowner, using your home as leverage for a second mortgage is considered low risk for a private lender.
When approaching a private lender, it is best to be prepared. If a homeowner is seeking a private mortgage in Toronto, they need to research local property values. To estimate a property’s value, a private lender will be assessing the most recent home appraisal as well as determining the value of similar homes in the surrounding area.
A private lender will prefer to see a sufficient down payment, all sources of monthly income including self-employed, freelance, rental, or investment income, and any spousal/child support monthly income. A private lender may also prefer to see any additional financial assets you may have to help leverage mortgage financing against.
Private lenders will mainly base their approval decision on the Loan to Value (LTV) ratio. The LTV ratio is based on a recent appraisal of your property and the total of all debts secured on the property. Toronto-based private lenders will lend up to 75% of the current value of your home. For example, if a property is worth $1,000,000 with an existing first mortgage of $500,000, then a second mortgage of $250,000 would have an LTV ratio of 75%. Lending beyond 75% of the appraised value of your home is deemed a higher-risk loan and a private lender may refuse your mortgage request.
Rates and Fees Associated With Private Lenders
When it comes to the mortgage rates associated with all types of private mortgage loans, generally private lenders will charge rates between 7% to 12% with fees ranging from 3% to 6% of the loan’s total value.
Although these rates are significantly higher than what the banks will charge, private mortgages are still popular due to their speed and ease of approval.
How To Find Lenders
Typically, for any private mortgage options, a mortgage broker will be able to direct you to a recommended private lender. This is by far the most popular way to connect with a private lender although lenders will occasionally advertise directly to the consumers.
Mortgage brokers like Mortgage Broker Store can also help connect you to an appropriate private lender to meet your mortgage needs. They also lend out private mortgage financing depending on your overall financial picture as they work with a network of private lenders across the GTA.
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