There’s been an increase in private mortgages both across the country and at home here in Ontario. One of the big reasons is that Canadians are facing obstacles from traditional lending institutions. Over 35 percent of traditional institutions tightened household mortgage lending requirements in the first quarter of 2023, according to the Financial Post.
The rise in Bank of Canada interest rates (holding at 5% as of September 15, 2023) is another factor in the change.
The Financial Consumer Agency of Canada’s (FCAC) most recent report states 75% of people with mortgages are struggling. Canadians are looking for alternative routes to buy a property or home that often includes private mortgages
Why are Canadians turning to private mortgages?
As of September 2023, there are three different reasons why Canadians are turning towards private lenders.
High inflation
The Bank of Canada needs to combat inflation by cooling down the economy and increasing interest rates. The higher the interest rates, the more expensive borrowing gets. That prompts many Canadians to look for an alternative to traditional lending institutions.
There are some other reasons why these loans are getting more popular.
- A private mortgage has a quick approval process and more streamlined requirements. There’s an emphasis on equity as opposed to the credit score that is favoured by banks and credit unions.
- A private mortgage is also a tool that can stop a power of sale or foreclosure.
- Private mortgages can also help people cover unexpected home repairs they can’t otherwise afford.
These alternative mortgage products are also an excellent way to pay for high-end renovations. Canadians are facing difficulties when they are looking for a loan and or a mortgage.
What are some of the loan obstacles faced by Canadians?
There are several things that can affect your chances of getting a loan. One of the big ones is your credit score.
Most Canadian lenders use the FICO model. Several things go into the three-digit number that makes up this score, including your payment history. Other factors include how many times you’ve acquired new credit and your credit utilization. These numbers generally range from 300 to 850. The higher the score, the better the chances of getting a loan. Keep in mind that even one late payment can affect this number.
There are other factors that can present a problem in getting approved for a loan, including:
- Loss of income is a big problem because traditional banks require proof you have a stable job.
- High credit card debt can also affect your ability to get approved.
- Generally, financial instability is a problem for Canadians looking to get a loan. Statistics Canada reports that in the fall of 2022, 35% of Canadians reported they were having difficulty meeting their financial needs.
Those are just some of the reasons people are having difficulty getting approved for loans. However, getting a private mortgage is always easier than obtaining a traditional product. Still, even those alternative mortgage products don’t come without risk.
Are there any risks associated with obtaining a private mortgage?
The Financial and Consumer Services Commission is a great place to find a list of the risks associated with these loans. These include the following:
Higher Rates
Because of low credit scores and other factors, private lenders take on more risks than their traditional counterparts. The higher rates they need to charge can present a bigger risk for repayment.
Interest Only Repayments
Certain private lenders offer interest-only products. These are different from traditional loans because the payments only get applied to interest. Some people taking out a private mortgage can find out they still owe the entire balance at the end of the term.
The Approvals Are Property Focused
Approvals for traditional mortgages rest on the ability of the borrower to repay the loan. The value of the property is the secondary consideration. With a private mortgage, the borrower qualifies based on the value of the property and its location.
Their financial situation is a secondary consideration. Even with these risks considered, private mortgages are trending in the country for a variety of reasons. For many people, the benefits outweigh the risks
What factors have contributed to the increase in private mortgages in Canada?
The benefits of private mortgages include what the money can be used for. Some people apply for and get a second mortgage. These can be used quite often to consolidate your debts or even refinance existing mortgage products.
Using a debt consolidation loan through a private mortgage means that you can reduce several payments to one. It’s essential to keep in mind that consolidating your debts this way will not affect your credit score.
Along with higher interest rates and rising inflation, a slowing economy is another reason that people are looking to private mortgages. For example, recent news reports (September 12, 2023) point to the fact that population growth is having a negative effect on the economy, at least in the short term.
Other factors come into play. For example, investments from businesses outside of the natural resource sector are the lowest they’ve been since 2020.
Mortgage Broker Store specializes in several different mortgage-related products. Mortgage requirements that don’t meet traditional lending institution requirements are one of our focuses. We have private lenders, brokers, and licensed mortgage agents on the team. We can help you prepare for and get a private loan that will suit your needs.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
