Private mortgages in Ontario are an alternative means of financing. While conventional banks and other institutions rely on credit scores and stringent metrics, private mortgages focus on equity and non-traditional income sources.
There’s been a consultation recently on new product suitability guidance. It will involve clear documentation regarding private lending and other expectations. These proposed changes aim to enhance the accountability of these lenders by implementing new disclosure requirements and standards.
The Financial Services Regulatory Authority of Ontario (FSRA) consultations closed on February 28th, 2024, and the results are forthcoming. The FSRA protects the rights of consumers in Ontario by regulating the mortgage brokers these private lenders work with.
Vulnerable Consumer Protection
This part of the consultation process closed on March 8th, 2024. The goals here include enhancing customer education, awareness and engagement. This is part of developing an approach to strengthening the Protection of Vulnerable Consumers. This process will use data-driven research and dialogues with regulated entities.
The goal of these efforts is to enrich the private lending experience.
FSRA’s Regulatory Initiatives
Documenting the suitability of people’s applications for private mortgages is a central part of this process. Clear records can help both applicants and brokers avoid legal issues. These assessments also help applicants looking at private mortgages ensure they are not overstretching their finances. They use a guidance-based approach that’s proportionate to the risks involved.
To that end, they put together a webinar on suitability assessment as part of this ongoing process.
The proposals also include new investor disclosure forms. The FSRA was looking for guidance from the involved parties. Specifically, they were looking to change two of the forums to improve transparency for private mortgage deals. This part of the consultation process will focus on making it clearer how private mortgages are suitable for clients. Updated releases can be found in the FSRA newsroom.
Another requirement is that level 2 agents, brokers, and principal brokers who deal in private mortgages must complete the private mortgages course by March 31st, 2024. There’s also an effort to protect vulnerable consumers by promoting fair and inclusive treatment in the consultation process.
FSRA’s Protection
This regulatory body focuses on transparency and has developed the consultation process for new product suitability guidance. The purpose is to ensure fair practice and consumer protection for private mortgages.
- Both brokers and agents must thoroughly assess a client’s risk tolerance, goals, and financial situation before recommending a product.
- The consultation will also seek to clarify communication around fees and terms associated with different private mortgage options. The amount of equity required for approval of one of these alternative loans currently stands at over 25%.
These proposals strive for fair treatment of consumers and to uphold the longstanding principles of fairness.
Private Lenders in Ontario
Private lenders, also called alternative lenders, work with mortgage brokers and others to facilitate loans for people who might not be qualified to get one from a more traditional institution like a bank.
These private lenders offer various products, including first and second mortgages, home equity loans and bad credit mortgages. They also offer home equity loans, which are termed hard money loans.
Private lenders have a more streamlined process and use different lending criteria. Rather than focusing on a credit score and traditional income sources, they look at equity and usually ask for more than 25% in any property. That means a proper property appraisal is important to establish the value of a house or other asset.
These lenders use alternative criteria, like income from a sole proprietor. Because their risk is generally higher, their interest rates are higher than those of a bank or credit union.
Factors Influencing Private Mortgage Interest Rates
The goal is always to get the lowest interest rate through a private lender, a credit union or a bank.
Applicants must consider three different factors to get the lowest rate on a private mortgage.
The first is the Loan-to-Value ratio (LTV). This is the formula that separates an alternative mortgage from a more traditional one. The LTV is a percentage that supplies a perspective on the loan you’re looking for versus a property’s appraised market value. In a larger city, the LTV is usually up to 75%. Towns with a population under 30,000 are considered small, and the LTV there is 65%. Private lenders will offer a rate between 8% to 12%.
The emphasis for an alternative loan is equity, but a stable income and credit score are still important for private lenders to make a final decision. For example, stable income is another criterion that needs to be considered. Usually, that’s defined as a regular and consistent income.
Although the credit score isn’t as important, it does play a role in a private mortgage. A score below 550 usually indicates bad credit and sets an applicant up for a bad credit mortgage through a private lender.
The proposed regulatory shifts for private mortgages will do more to protect vulnerable lenders and encourage transparent transactions. Safeguards are being proposed to ensure people don’t overextend their finances. What’s more, more thorough risk assessments are being done that will make private lending more inclusive, transparent, and streamlined.
Looking for Private Mortgages?
Mortgage Broker Store focuses on several mortgage-related products that have streamlined acceptance criteria. One of our priorities is loans that don’t meet traditional lending institution requirements. Our team includes realtors, private mortgage lenders, brokers, and authorized agents. Let us help you prepare for and get a product that meets your requirements.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
