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23 Nov

Can’t qualify for a bank mortgage? How do private mortgage work?

Mortgage Tips

Posted by: Kiki Berg

There is almost ALWAYS a mortgage solution. New to Canada? Self Employed? Maybe a few credit glitches in your past? Not everyone can qualify for bank mortgages today. It’s doesn’t make you a bad person, it makes you a savvy person getting the best mortgage for your situation! With the mortgage rules constantly changing, private or alternative mortgages are becoming the only way many people can refinance or buy.

Did you know that according to the Globe and Mail report “self-employed now represent about 15.6 per cent of all working Canadians”

There is a misconception, that alternative or private mortgages are only for bad people. Some folks call it “subprime”. Don’t let the word “subprime” scare you as our lending practices here in Canada are very strict and all federally regulated.

What is Alternative or Private Mortgage Financing and who uses it? 

Private mortgage financing can be an excellent alternative for those that are either:

  1. Self Employed and declare little or no income

  2. Micro-condos that are less than 400sqft (banks generally won’t finance these)

  3. Foreign investors

  4. Non-residents of Canada

  5. Credit Challenged

  6. Owe CRA back taxes

  7. Property Taxes that are in arrears

  8. People going through a foreclosure

  9. Construction financing and commercials loans

  10. Equity takeouts for starting a business

  11. Short term financing that has is open and has no penalties

  12. Don’t want to refinance their 1st bank mortgage as the penalties are to high.

  13. Requiring funds up to $20 million dollars

Many Banks and mortgage brokers don’t specialize in private financing. It’s vital to ensure these types of mortgage files are are submitted and packaged different than a traditional bank type mortgage.

If it’s submitted without care and due diligence you may pay a higher rate and HEFTY fees!When you are applying for traditional mortgage (meaning your are a typical T4 employed client, good credit and saved down payment) the CLIENT is qualified based on the PERSON first, then the property.

When you apply for private financing, the PROPERTY is qualified for the mortgage first and then a few details about the client.The property and location, location, location is what the lender is lending on. A property in a marketable area such as Vancouver Westside, North Vancouver and West Vancouver are PRIME marketable properties that private lenders like. The risk is lower, so better rates they can offer. Certainly properties anywhere in Canada are all options for private financing, even in small communities as well. Mortgages are also available for remediated, non-remediated and legal grow op properties as well.
What about the Rates?
Valuable and marketable properties can get financing with 25% down, but you can expect to pay 2-3% higher rates than if you have less than 25% down, as their is more risk taken by the lender. The rates for a 1st mortgage today (2017) are as low as 5.75% for a strong mortgage file to 10% for a less desirable property. 2nd mortgages can range 12-15%. The bonus of course, it you can opt to only pay “interest only” and can be fully open so you don’t have to pay the penalty to break the mortgage.
I hear there are Fees?
There are almost always fees for private mortgages. This is how the broker is paid for working on your solution. Fees depend on your broker. I have seen as low as $500 to as high as 5% of the amount you’re borrowing; the average is 1% (for example: $400k mortgage would have a $4,000 fee), so good to ask this upfront and ask a few brokers that SPECIALIZE in private financing.
Having an EXIT strategy
If you get a short term (1-2 year) private financing, as your mortgage strategist, I want to ensure we have a “exit strategy” plan in place to have to moved to a traditional low rate mortgage soon. This is especially true if the reason for the private financing is credit, income or back taxes. We will work together to ensure this plan happens and is followed through.