With interest only payments, the cash flow requirements of a private mortgage tend to be lower than a fully amortized payment from a conventional lender, even though the conventional lender’s interest rate may be substantially lower.
Private lenders prefer interest only payments in most cases as it maximizes their return on investment as interest is always being earned each month on the full amount of principal advanced to the borrower.
But there are also cases where the borrower does not have sufficient cash flow to pay even an interest only payment.
In these situations, a private lender may consider prepaid interest whereby an interest reserve or allowance is deducted from the face amount of the mortgage and held in trust by the lender to cover off the monthly interest costs as they are incurred.
Prepaid interest can be for all or part of a private mortgage term. The key to being able to qualify for prepaid interest with a lender is for the borrower to have sufficient equity in the property in order to leverage a higher loan amount that can provide for the cash requirement of the borrower as well as fund the prepaid interest requirement.
The third option is a principal and interest payment, either fully amortized like you would have with a bank or institutional lender, or some other form of principal portion, being it a fixed amount each month, or a lump sum at the loan anniversary date if the term is more than one year, or some other variation.
From the private lender’s point of view, an amortized principal and interest payment can be required with higher risk lending scenarios to increase the speed of repayment of the mortgage and reduce the lender’s risk of loss in the process.
From a borrower’s point of view, if he or she has good cash flow, but can only qualify for a private mortgage due to poor credit or some other reason, then paying down the mortgage as fast as possible through an amortized payment may be preferred.
If you would like to know more about private mortgage payment options available to you, I suggest that you give us a call and and a member of our team will get all your questions answered right away.
During the spring of 2011, the rules governing institutional mortgage providers in Canada changed considerably including 1) a reduction in the maximum amortization period offered from 35 years to 30 years, 2) reduction in the amount of mortgage refinancing that can be obtained under and insured mortgage from 90% to 85%, and 3) discontinuance of mortgage insurance for a home equity line of credit.
One of the results of this change is that now there is very little difference if any in many cases between what a borrower can secure from an institutional lender versus a private lender.
In the past, those that could qualify for banks rates, would apply for a mortgage refinancing or a second mortgage, and get financed up to 90% through an insured mortgage.
But now with the change in the rules, for those individuals that are looking for the maximum potential home equity loan possible, private mortgage financing can sometimes become a better option.
We should mention at this point, that private lenders do not like to entertain debt leverage of more than 75% to 80% on most mortgage applications. But for “A” lenders that have great credit and solid income, second mortgages can go as high as 90% loan to value related to the risk associated to the property and the borrower.
So for the “A” lender that needs more capital than the bank can now give them, private mortgage financing has become more of an option, even at a higher cost of borrowing.
But there are also benefits that come with the higher cost of financing. First of all, no insured mortgage premiums to pay. Second, private mortgages are typically much faster to get in place and if time is of the essence, this can be a better solution anyway compared to losing out on a deal or defaulting on payments that may incur penalties or worse.
While the mortgage rule changes are not going to create a stampede to private second mortgages, for a number of “A” credit borrowers, there will be more interest in this type of financing if the amount required cannot be secured from the borrower’s traditional sources.
If you would like to know more about alternative mortgage financing options from both institutional lenders and private lenders, please give us a call to book a time to speak with a member of our team.
Its not uncommon that individuals will call us looking for private mortgages for situations where 100% of the property value is required, and/or where the house is in very poor condition, and/or where there is very little potential to service the debt.
And when we tell them that we can’t help them with the scenario outlined, they sometimes get offended and challenge our competency as mortgage brokers, which is of course their right.
But the approach is hardly a realistic one.
Is it possible to find a private lender that would be prepared to provide financing against this type of scenario. Yes it is possible. Most things are.
Is it probable? No its not probable.
A Private mortgage lender is a business person or investor who’s goal is to make money while minimizing risk.
We are fortunate to deal with a large cross section of private mortgage lenders that each have their own focus areas, areas of specialization, and geographic target markets.
The key is always to match up the right borrower with the right lender in order to complete a private lending transaction and that’s something we are pretty good at.
But it starts with being able to identify situations that a private lender is going to be interested in financing and situations that are unlikely to attract very much if any interest.
Most people will view private mortgage lending as an action of last resort, and many times this can be the case when all other known possibilities have been extinguished.
But even as a lender of last resort, a private lender still has requirements that they are looking for, each somewhat different from the next.
Regardless of the private lender, however, is the objective to minimize risk and produce a profit from their lending efforts.
If a mortgage lender of any type cannot see a clear path to meeting these objectives, then its not likely you’re going to secure the mortgage that you seek.
It all starts with realistic expectations and moves forward from there.
Remember that the key tenants of private mortgage lending in general terms are the value of the security being offered, its marketability, and the available cash flow to service the debt and retire it at the end of the mortgage term.
If you have some combination of these factors that would support a lending decision in your favor, then there is likely a private mortgage solution out there for you.
If you are looking for a private lender to take on 100% of the risk without a high probability of a return, then you’re likely going to be looking for a long time.
Remembering that a fool and his money are soon parted, any private lender that takes on unrealistic deals will soon be out of business and not available to you or anyone else.
To find out what you’re private mortgage options are, please give us a call and book a time to speak to a member of our team and we’ll go over your situation with you.
So in this sense, any mortgage broker can declare themselves a private mortgage broker or market private mortgage financing products.
But a mortgage broker with a proficiency to place private mortgages is likely going to have a focus on this type of residential home mortgage financing and will have well established, direct relationships with a variety of private mortgage lenders.
This is an important distinction to the average consumer looking for a private mortgage or information on their private mortgage options.
Most brokers will claim to have access to private funds, but in reality they are working through a broker network of some sort where they are two or more steps removed from the actual source of money. This can create challenges in terms of the responsiveness in service and the relevance of the private mortgage lenders being contacted on your behalf.
There are many different variations in private lending which can result is a wide spectrum of offerings and interest in any particular application. The more knowledgeable the front end broker you are working with, the more likely your financing requirements will be placed in front of a source of private funding that will not only be interested in your application, but will also be providing you with a competitive offering.
Working through a series of brokers will not only slow down the process, but may also increase the broker fees being charged on the deal, adding even more cost to the process.
Toronto private mortgage brokers that have a focus on this type of lending are not only more likely to get you connected with the right source of funding sooner, but also will help you get the deal closed and funded in the time you have to work with, which can be short in many situations where private mortgages are required.
If you need a private mortgage for a Toronto or GTA property, we suggest that you give one of our Toronto private mortgage brokers a call so they can quickly assess your requirements and provide you with relevant options for your immediate consideration.
In reality, anyone can be a private mortgage lender if they choose. If you have the funds to extend, you can be a private lender.
Many private money lenders are also real estate investors. Being involved with real estate properties within a certain market area gives them the ability to assess the market value of the property and make a lending decision. At the same time, there is nothing that says that someone that is not a real estate investor can’t provide private mortgages either.
Toronto private money lenders, for the most part, are a providing home equity loan in the form of a residential home mortgage or commercial property mortgage. These mortgage financing opportunities occur largely because bank or institutional financing can’t be arranged at all or within a required time period.
The reasons for requiring a private mortgage are similar to the reasons for acquiring a conventional mortgage … property purchase, home mortgage refinance, debt consolidation loan, and so on.
In order to properly and efficiently conduct business, a Toronto private money lender will tend to work through a lawyer and a mortgage broker. The lawyer provides all the documentation and mortgage registration requirements while the mortgage broker brings applicants that meet the requirements of the private lender.
Each private money lender or private lending group will have their own focus in terms of what real estate they are prepared to finance, where its located, the amount of financing they are prepared to extend, terms and rates, etc.
From a customer point of view, a private mortgage works the same as any other type of mortgage, carrying the same legal property registration and providing the same rights under the law to both borrower and lender. The terms and conditions offered can be different as they are with any mortgage, but the basis of the agreement between borrow and lender is pretty much the same.
Because there can be considerable variation in deal interest from one private lender to another, its important to try and approach those individuals who are most relevant to your particular situation and requirements.
The only way to effectively do this is to deal through an experienced mortgage broker that has considerable private lending sources and a track record for locating and closing private mortgage financing requests for the type of property you have.
If you’d like to locate Toronto private money lenders, we suggest that you give us a call and speak to a member of our team and we’ll connect you into relevant private lending sources.