How to Calculate Interest on a Private Mortgage?

How to Calculate Interest on a Private Mortgage?

With all the talk surrounding historically low-interest rates, the housing boom in Ontario remains the focus of attention for many both inside the real estate and mortgage sector and those Ontarians that currently own houses or looking to borrow. 

Since the start of the pandemic just over a year ago, the Ontario housing market has been in overdrive. Year-over-year sales numbers are all in the double-digit territory in cities throughout Ontario both large and small.  

According to the April 2021, Toronto Housing Report the average price of a three-bedroom single detached dwelling has increased by 36% to hit an all-time selling price of $1.4 million. The average overall selling price has skyrocketed to $1.1 million and April housing sales increased by nearly 97% compared to this time last year with over 15,000 units sold.

There is no question that one of the driving forces behind the surge in overall housing sales and dramatic increases in housing appreciation has been the extremely low cost of borrowing. With rates as low as 1.58% on some mortgage types, many Ontario homeowners/borrowers are racing to lock in rates on secured mortgage loans. Although both fixed and variable interest rates remain at very low levels, we have seen a slight increase in fixed rates beginning in early April.

Many Ontario lenders have recently announced there will be an increase of between 0.1% and 0.2% to the current variable rates offered by most lenders on Fixed-rate mortgages. As of the end of February, the lowest fixed rates available stood at 1.39 percent. An increase of between 0.1 to 0.2 of a percentage point is minimal but is a good predictor of a trend set to continue in the coming months.

Characteristics of Private Mortgages

What if you have damaged credit? The answer lies in the type of mortgage that you will be able to secure if creditworthiness comes into question. Although banks (referred to as A lenders) and trust companies/credit unions (referred to as B lenders) may be able to offer rates close to the lowest reported, those with a low credit score will need to look to other lending options. 

In Ontario there exist well-established and experienced private lenders (referred to as C lenders) who will be able to offer private secured mortgage financing. Overall mortgage rates associated with private mortgage loans will be higher than those offered by both A and B lenders. These loans will, however, be negotiated quickly and provide valuable short-term mortgage financing solutions for those Ontario homeowners/borrowers with poor credit.

Private loans are structured differently than traditional long-term amortized mortgages typically offered by the banks:

  1. Private loans are structured as short-term loans. Mortgage terms typically range between 1 to 3 years.
  1. Private loans are negotiated quickly. Unlike the banks that put borrowers through stringent mortgage stress tests and demand near-perfect credit scores, private mortgage loans are negotiated more quickly, and obtaining private mortgage financing remains a straightforward process. Generally, a private loan can be negotiated in as little time as a few days to a week.
  1. Different private mortgage loan options are available depending on a borrower’s financial objectives.

Private Mortgage Loan Options

What Mortgage Rates are Associated with Private Mortgage Loans?

Although interest rates are propelling many Ontario homeowners/borrowers to take out mortgage financing, if you have poor credit the banks are not the answer. Stringent criteria prevent many with damaged credit from obtaining mortgage loans.

Private lenders are available to help secure short-term mortgage financing to alleviate immediate financial needs and enable Ontario homeowners to tap into their valuable equity despite credit issues. What rates should you expect on a secured private mortgage loan? Generally, the interest rates range between 7% and 12% depending on your specific financial picture. The exact rate will reflect the inclusion of other criteria including financial assets, existing equity, and income.

Fees Associated with Private Mortgages?

Just as in the increased mortgage rates associated with private mortgages compared to their bank counterparts are higher, so too are any fees related to each private mortgage loan. As a rule of thumb, an Ontario homeowner/borrower should expect to pay between 3% to 6% of the total cost of the loan. Fees cover the costs of the loan for the private lender and are passed on to the borrower when taking out a private mortgage.

What Criteria are Private Lenders Looking for?

When private lenders are calculating the final interest on your mortgage loan they are assessing specific criteria. Depending on the numbers presented, a private lender will assess the overall risk of the mortgage loan and assign an interest rate that reflects the mitigated risk of the loan. Private lenders are looking to three main variables when determining mortgage rates and final loan amounts:

  1. Overall Loan-To-Value. Lenders in the mortgage industry will determine the LTV on all mortgage loans which simply represents the ratio of a loan to the value of an asset. A private lender will assess a recent appraisal on your property and determine the loan amount in relation to the appraised value. A private lender will lend up to 75% LTV which represents 75% of the appraised value of your home.
  2. Existing Equity– A private lender will determine the amount of equity that has been built up in your property when determining the overall loan amount and interest rates. Private lenders prefer to see at least 25% existing equity in a given property.
  3. Income– With a private mortgage loan, the type of income of a borrower is not a barrier to financing. While a bank may prefer full-time salary-based income, a private lender will calculate all sources of income including self-employed, contract, and investment income.
  4. Additional assets– It is best to bring a list of any additional assets you may have to include in the criteria that private lenders are including when calculating interest and total mortgage loan amount.

Mortgage Broker Store Can Direct you towards Suitable Private Mortgage Options

At Mortgage Broker Store we have access to a network of established private lenders. We can determine the type of mortgage financing that will suit your financial objectives. We will be able to point you in the direction of a private lender to help negotiate terms on a secure mortgage loan option.

Poor credit does not have to stand in the way of securing mortgage loans. Whether you are seeking a first mortgage to purchase a home or would like to tap into the existing equity in your home, private lending options are available to help make these mortgage goals achievable.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.