What is a Private Mortgage?
A simple private mortgage definition is a mortgage or loan that is borrowed from a party other than a bank or institutional lender. Typically this is a private individual or private mortgage corporation that offer their own money for the loan.
Wait a minute…you are losing me here. What?
I get it…you don’t deal with this everyday. There was a lot of technical language in there so let me break it down into even simpler understanding with a short story.
A Simple To Understand Definition
Belle and Thelma are old college friends and they both cashed in some stocks. They are looking to make a better return than the money sitting in the bank.
I explain to them that they can lend this money into a mortgage. You approach me for a loan and the bank turns you down. Belle and Thelma are happy to lend you the money as it will be backed up (or secured) by the equity in your home.
With a private mortgage company, the process is a little more complicated. These companies combine individual investor’s money and then lend it out to folks like you. There are more guidelines in order to qualify for the loan however nothing as complicated as a bank mortgage.
Higher Loans With Private Mortgage
Another distinguishing factor of a private mortgage in Ontario is that it can be used to borrow above 80% of your home’s value. The bank are only allowed to lend up to 80% of your home’s worth and a private mortgage enables homeowners to access their equity up to 90% of your home’s worth.
A quick example is you own a home worth 800K today. You have a 1st mortgage of 640K or 80% of it’s value. With a private mortgage you can access up to an additional 80K.
Find out more about all of the things you need to know about your Private Mortgage Made Easy
Private Mortgage Structure
Typically private mortgages are interest only, short term loans that assist a borrower that is in need of the money for 1 to 2 years. These are not hard and fast rules as private mortgage terms can vary depending on the lender.
But why would anyone want to borrow money for such a short amount of time? And why would they want to only pay the interest?
1. The reality is that private mortgages are more costly than bank mortgages. So the goal is to structure the length of the loan for the least amount of time possible to fix the problem that caused you to need to borrow a private mortgage loan in the first place.
Then we can look to refinancing this higher cost debt back to lower cost debt. This saves money in the long run.
2. The reason for an interest only payment is that typically people who need to borrow a private mortgage are already in some type of financial hot water. So the last thing they need is a high monthly payment.
Paying interest only for a short period of time can really help in staving off financial ruin. The additional monthly cash flow can be used to save an emergency fund, pay down additional high interest debt, or finally get that new washing machine that you have been putting off for way too long.
How Private Mortgages Are Loaned Out
Private mortgage lenders will provide you with the money based on their risk tolerance. This is another distinct difference as with bank mortgages you either fit their qualifications box or you don’t.
For example, you may be behind on your income taxes and private lender A says that this is a risk too high for them so they will not lend. Private lender B comes along and says, they see the tax arrears, they are willing to provide the private mortgage loan to pay them out and they price the loan accordingly.
So how do private lenders decide what is too risky and what is not? How can I know if my situation is too risky to get a loan?
When a private mortgage lender considers your loan application the two questions they ask themselves are:
1. Are these people going to be able to make the mortgage payments?
2. Am I going to get my money back?
If they feel the answer to either of these questions is no or not likely, your loan is considered risky.
Whether it is too risky or not is up to the individual lender. Working with a wide variety of private lenders, what one lender considers a material risk (translated: they will not lender to you) to the next is an ever changing answer.
I help you by knowing who is lending in private mortgages and how to get your loan approved. Contact me today to learn more and how to get your money!