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  • Writer's pictureJose Gustavo Salcedo

Private Mortgages: What Brokers Need to Know

Updated: Dec 11, 2023

When it comes to mortgages, most of us think of big banks and well-known lenders as the go-to source for financing our dream homes. It’s like going to McDonald’s for a familiar, fast meal. But the world of private mortgages is more like an independent burger joint; you might not find the same things in every order, but it can still be delicious. Derek Serra, the president of Westboro Mortgage Investment Corp, explains that private mortgage lenders can vary widely, making it important for brokers to understand the ins and outs of this specialized industry.

Private Mortgages Are on the Rise

Private mortgages make up a relatively small portion of Canada’s total loan volume, accounting for about 10% of all mortgages as of Q4 2022, according to CMHC data. However, their share has grown by 45% over the past 10 quarters. These mortgages often come with higher interest rates, making them a viable option for homebuyers who can’t secure financing through traditional lenders.

Who Chooses Private Mortgages?

Many homebuyers who turn to private mortgages are facing stressful situations. Some may be in financial trouble and need a short-term solution to navigate a challenging situation quickly. Others, like newcomers or self-employed professionals, may opt for a private mortgage because they find it difficult to prove their income to traditional lenders. These borrowers often look to brokers for guidance on selecting the right lender.

Navigating the Private Mortgage Landscape

One of the challenges with private mortgages is that they can be tricky to navigate, and clients may not fully understand what they need. Brokers play a crucial role in providing guidance to clients. The application requirements for private mortgages can differ significantly from those of traditional lenders. Some private mortgage investors may not even require homeowners to submit documentation. Therefore, it’s important for brokers to educate clients and help them make informed decisions.

Read the Fine Print

Private mortgages may come with additional fees and terms that conventional mortgages do not have. For example, some private lenders impose penalties on open mortgages for customers who don’t provide sufficient notice before exiting. Others do not adjust rates when the Bank of Canada’s prime rates drop. Brokers must thoroughly read and understand the fine print, as private mortgages can be offered by individual investors, investor syndicates, or mortgage investment companies, each with their own risk appetites.

Prepare Your Paperwork

Brokers can improve their chances of securing better terms and rates for clients by submitting detailed mortgage applications. Lenders pay close attention to assessments of a home’s condition, particularly in comparison to similar properties in the area. A ‘fair’ or lower condition rating could give a lender pause. Brokers should also be diligent in disclosing any unique features or issues with the property.

The Importance of an Exit Strategy

One of the most significant differences between private and conventional mortgages is the exit strategy. In a Home Equity Line of Credit (HELOC), a broker may not hear from their client for decades. Private mortgages, on the other hand, typically have shorter timelines, ranging from months to just a few years. Brokers should engage clients in discussions about exit strategies, with the goal of transitioning them back to the prime lending market when the time is right.

The Bottom Line

Private mortgages can be a lifeline for homeowners who can’t secure financing elsewhere, but it’s essential for mortgage brokers to familiarize themselves with the nuances of this market. Deals can go awry when brokers are unfamiliar with private mortgages. Getting it right not only secures the deal but also earns the broker a client’s loyalty for life.

In Ontario, it’s worth noting that brokers arranging private mortgages and investments for private investors and mortgage lenders must now obtain a level 2 license from an FSRA-approved provider. These re-licensing requirements ensure that brokers are well-equipped to navigate the world of private mortgages.

In conclusion, private mortgages offer an alternative financing option for those who may not qualify for traditional loans, and brokers play a pivotal role in guiding clients through this unique landscape. With the right knowledge and a focus on the client’s needs, brokers can make private mortgages a valuable resource for homeowners in challenging situations.

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