If you’re looking to get a loan or mortgage, you have several different options to choose from that have different interest rates and other features. Banks and credit unions are a traditional source, and they have some pretty stringent requirements for acceptance, like a good credit score.
Private lenders follow different regulations, and they have more lenient requirements. These alternative lenders are a good choice for people who might not be able to get money from a bank. They can use the loan to pay for unexpected home repairs, consolidate debt or a variety of other reasons.
Here’s what you’ll need to know to make the best decision when it comes to the interest rates these private lenders charge and the features they offer.
Ontario’s Interest Rate Options: Private vs. Traditional Lenders
First off, it’s important to understand that Ontario is seeing a bump in the number of private mortgages people are looking for. According to the Toronto Star (September 27, 2023), there was an 8% bump in the number of people applying for private mortgages from 2021 to 2022.
The interest rates are different for traditional or private products.
- While private lenders are more flexible than their traditional counterparts, they often charge higher interest rates. Quite often, their applicants have been turned down by traditional banks and credit unions due to factors like a low credit score. These people get approved faster with a private lender, but they represent a greater risk.
- Banks have stricter criteria for eligibility but lower interest rates. They focus on factors like an applicant’s credit score. According to Equifax, a score below 660 is less likely to qualify for a traditional loan.
Private lenders and traditional lenders set their interest rates using different criteria. While private lenders are regulated under the Ontario Mortgages Act, credit unions and banks are regulated by the federal government.
Key Factors Influencing Private Lender Rates
Private lenders focus on the amount of existing equity in a house or other type of property and the appraised value. They use what’s called a Loan to Value Ratio (LTV) that’s no more than 75% of an appraised value.
Here’s an example of how this works. A property has a market value of $1 million. They have $ 750,000 on a mortgage and that equals out to an LTV of 75%.
There are other factors, including:
- The equity that’s been built up in the property is important. Private lenders usually require over 25% before accepting an application for a private loan.
- The location makes a difference as well. There’s a lower consumer demand and rate of appreciation for rural property. That’s why the people who own homes in rural areas usually need over 30% in home equity to qualify for a private mortgage or loan.
Beyond how these rates get set, there are some other things you’ll need to know about getting a private loan that can help you make the right decision.
Latest Trends in Private Lender Interest Rates
The interest rates the private lenders charge rely on a much more lenient set of criteria. However, people should know that interest rates and inflation often go in the same direction.
Here are a few different things that private lenders consider when they are setting their interest rates.
- Monetary policies can change to affect these rates. Central banks raise their interest rates when they are trying to curb inflation. Private lenders follow these trends as the rates go up. Traditionally, private lenders charge more than traditional lending institutions, but there’s a streamlined acceptance process. There’s some other good news: the Bank of Canada has held its policy rate at 5% as of October 25, 2023.
- On the other side of the inflationary interest rate trend, goods and services cost more as inflation spikes. That makes housing less affordable as the demand drops. With the reduced demand, the interest rates are lower.
Currently, one of the trends is that people need to use credit to buy bigger ticket items as their wages are not increasing. This means more customers for the private lending industry. There are some excellent options available from these alternate lenders.
Popular Loan Options from Private Lenders
Private lenders offer different loan options for people with damaged credit scores who might not qualify for a loan from another institution. These include:
- Second mortgages on homes and other properties.
- Consolidation loans to pay off high-interest credit cards and other debts in one monthly payment.
- Home Improvement loans which can provide you with the money for immediate renovation needs.
- Home equity lines of credit (HELOC) that let you access any equity you’ve already built up on an existing property.
Private lenders also offer first mortgages and bridge loans. The process is streamlined and efficient. However, like a lot of financial products, private lender loan options don’t come without risks.
Navigating Risks When Working with Private Lenders
These lenders take on a bigger risk because their clients have low credit scores. Borrowers need to be aware of the following.
- They need to charge higher rates than more traditional banks and credit unions.
- Some private lenders offer products where the payments only get applied to interest. That means it’s possible to take out a private loan and find out at the end of the term that you still owe the entire balance.
Mortgage Broker Store focuses on mortgage-related products. Mortgage applications that don’t meet lending requirements from traditional lenders are one of our specialties. Our team consists of private lenders, brokers, and licensed mortgage agents. Let us help you get a private loan that will fit with your budget and needs.