Before you can understand how private lenders break down the fees for their services, it’s good to have an overview. These individuals and/or financial companies are also called alternative lenders. They can help you finance or sell quickly.
One of the big differences between them and more traditional places like banks and credit unions is how they work. Private lenders tend to operate independently from more regulated financial institutions like trust companies, credit unions and banks. Comparing the two options means digging deeper and realizing that a bank is more regulated than a private lender.
There’s more. You’re more than likely to pay a higher interest rate with an alternative lender than a more traditional one. The reason is simple. These private lenders are taking on a bigger risk. Applicants that they evaluate often have damaged credit scores. Some are even facing evictions through a power of sale or foreclosure.
Understanding the different types of loans and mortgages available can help you make the right decision.
What Types of Products Do Private Lenders Offer?
Once the process works through to the private lender, you’ll have several different products. The options include:
- Hard Money Loans- Basically, this is an American term for private lending in Canada. The application process is more straightforward with these alternative hard money loans. However, applicants should expect to pay higher interest rates.
- Home Equity Loans– This is a second mortgage that’s calculated based on the amount of equity you have in your home. The money gets paid out in a lump sum, and your house is used as collateral. With all the paperwork, you can get the money fast.
- Bad Credit Mortgages- For many homeowners, the last several years have been volatile. Generally, Equifax sees credit scores ranging from 580 to 620 as subprime. Lower scores pose challenges in securing approval from traditional lenders but not private lenders.
- Second Mortgages- Private lenders focus on metrics like equity rather than more traditional benchmarks. Property owners with at least 25% of the equity in their own property stand a chance of getting approved for a second mortgage. However, this is the upper limit.
- First Mortgage- A private mortgage usually needs an appraisal or home inspection. However, the whole process is easy to qualify for, and it has a shorter approval process.
Understanding the different products available helps you to have a good idea of your options. Interested applicants understandably want to know the rates they can expect from private lenders and financing for a property.
Costs Involved in A Private Lender Mortgage
Private mortgage lenders are more expensive than any other type of mortgage lender. There are no standard costs, but most lenders try to offer rates and fees that are competitive with other lenders. Here are some costs to expect as of December 2024:
- Interest Rates: Typically between 8% and 12%
- Lender Fees: Usually between 2% and 4%
- Broker Fees: Set to match the lender fees, which are usually 2% to 4%
- Appraisal Fee: $500 + HST for single-family homes in Ontario. Larger or unconventional properties will cost more.
- Legal fees: These range from $1,000 to $3,000, depending on the mortgage request.
How LTV Affects Costs
The Loan-to-Value (LTV) ratio plays a big role in determining your costs. Simply put, the closer your mortgage is to the lender’s maximum allowable LTV (typically 75%), the higher your rates and fees. Lenders see higher LTVs as riskier, so they charge more to compensate. Calculate this ratio by taking all existing mortgages plus all proposed mortgages and dividing by the appraisal value.
Here’s an example of how costs can vary based on LTV:
| LTV (%) | Interest Rate (%) | Lender Fees (%) | Broker Fees (%) |
| 50% | 8% | 2% | 2% |
| 60% | 9% | 3% | 3% |
| 70% | 11% | 3.5% | 3.5% |
| 75% | 12% | 4% | 4% |
What You Need to Know About Fees
Your mortgage amount includes specific fees, such as lender, broker, and legal, which are included in your mortgage amount and count toward the LTV. If your request is already at 75% LTV before fees are added, you might exceed the limit and not get approved. Appraisal fees are typically not included in the LTV and are paid by the borrower directly after the inspection is performed.
A good mortgage broker will provide documents that clearly outline all costs related to the mortgage, and whether or not they are included in the mortgage amount. Reviewing the costs with your broker is always a good idea to make sure they fit your financial plan.
When applying for private mortgage lenders in Ontario, you must state why you need the money. Private lenders are usually lenient and will accept the most reasonable responses.
Some popular responses include:
- To pay off high-interest credit card debt
- To pay for home repairs or renovations
- To cover living expenses after a work layoff
- To stop a power of sale or foreclosure
- To pay tuition fees for college or university
In many cases, borrowers approach private lenders for mortgages and loans to help consolidate existing debt or prevent property loss through foreclosure or power of sale proceedings. Many people juggle multiple types of debt at once. For example, as noted above, you might have a mortgage and a significant amount of credit card debt or outstanding student loans. Since mortgage and student loans are owed to different collectors, you may have to keep track of multiple monthly debt payments. A mortgage from a private lender can be enough to pay off what remains on your mortgage and your student loans. Upon settling individual debts, you’ll have a monthly payment to your lender, simplifying your financial obligations. Many borrowers find this an easier way to manage debt.
People who cannot qualify for a low-interest rate loan at a bank are the kind of clients that private lenders seek out. Our private lender network can provide mortgages to people turned down by banks. Most private lenders will offer a rate between 8% to 12%.
Administrative and Other Fees
There are several costs involved in putting together a private mortgage. For example, lenders need to pay the people who do the administrative work by drafting paperwork and putting together the property data. They need to pay employees and put some money aside for government agencies. This fee usually runs somewhere between $300 and $650.
Following are a few other costs you might incur with the private mortgage.
- The mortgage termination fee comes at the end of the loan term. It is usually three months’ worth of interest payments and covers related costs.
- Like a more traditional mortgage, there are legal fees that need to be paid out. Depending on how complicated the mortgages these could run anywhere between $1000 and $3000.
- There is also an appraisal fee to consider. The company performing this task needs to be an AACI or CRA accredited by The Appraisal Institute of Canada. The money often totals between $300-$500.
Lender and Broker Fees
These lender fees usually represent a portion of the loan. These are usually 2% to 4% of the entire cost of the loan itself. These help a private mortgage lender set up and discharge the product. The lender fee may be higher for a variety of reasons, including:
- Legal or administrative issues to overcome
- High LTV is requested
- Rural property
- The loan is given rush priority
- The mortgage incorporates custom terms or conditions.
The total must include the mortgage broker fee. These are roughly equal to the lender fee. This means that the total for lender and broker fees will usually range from 4% to 8%. The money goes to pay the administrative staff, agent, and mortgage broker. This team arranges the product.
It includes the Loan-to-Value ratio (LTV) of your existing property. Private lenders will generally go as high as 75% of the LTV value when they are deciding on the amount of the loan. Other criteria include the condition of the property and the local market demand.
Remember, Mortgage Broker Store supplies private mortgages and buys houses for cash in the GTA. There’s no real estate agent to deal with and no commission to pay with us.
