What is a Private Lender?
A private lender (also sometimes called an alternative lender) is a person or financial entity that works independently of federally or provincially regulated financial bodies such as banks, credit unions, and trust companies. A private lender can lend money and provide mortgages and other types of loans to borrowers that, for a variety of reasons, may not qualify for a similar loan from a bank.
Private lenders can offer a variety of loans including:
Many private lenders work with mortgage brokers to connect with potential clients and borrowers. If you’re looking for a mortgage but have been turned away by banks or are simply unsure of where to start, booking an appointment to speak with a licensed, experienced mortgage broker is a great way to begin the process. A reputable mortgage broker can explain the different types of loans available to you, what interest rates you may qualify for, and what type of lender may be able to best meet your needs.
A broker can also walk you through the steps and requirements for getting approved for a loan from a private mortgage lender, and help you gather all the paperwork you’ll need to provide.
While private lenders are not required to follow certain federally enforced standards about whom they can and can not lend money to, private lenders still have their own requirements.
Private Mortgage Lender Loans
Private lender loans are fairly easy to qualify for. In most cases, lenders will approve loans on properties that have at least 25 percent available equity. Equity, here, is defined as any value in the property that does not have a debt against it. For instance, if you have a home with an appraised market value of $1,000,000 and total mortgage owings of $750,000, you have 25 percent equity.
Since equity is so important to private lenders, many will require that you have your property appraised as part of the approval process, or roll appraisal fees into the setup fees for your mortgage loan. In determining the size of the loan you can get approved for, it’s instrumental that the lender has an up-to-date estimate of your property’s market value.
Most private lender loans are taken out against residential properties. For commercial properties, the level of equity required is a little higher, usually around 35 percent.
Canadian private lenders focus on the market value and existing debts on a property when deciding whether or not to approve a mortgage application. Banks usually use credit score as a key deciding factor with mortgage applications, however, private lenders can lend to people with good or bad credit. Private lenders will calculate a metric called a Loan to Value (LTV) ratio on a property to determine if it is a worthwhile investment. To calculate a property’s LTV you divide the value of the existing mortgages by the market value of the house. To give an example, a house with a market value of $1,000,000 and $750,000 in existing mortgages will have an LTV of 75%. Most private money lenders in Ontario will not invest in residential properties with an LTV of greater than 75%.
This is because private lenders focus mainly on the amount of equity in the property. A high LTV means that the borrower already has a significant amount outstanding on their existing mortgage. In the event that the borrower defaults on their mortgage, forcing the lender to sell the home to recoup the costs, the primary mortgage lender is paid back first. The higher a property’s LTV, the less likely it is for the private lender to be able to recoup their losses if the borrower defaults.
While the LTV is perhaps the most important piece of approval criteria for getting a loan from a private lender, there are other criteria that can help you secure a better interest rate or a higher loan sum. Having a source of a steady income is important for getting a better rate, and a demonstrable history of financial responsibility — such as paying off other debts on time, or having other investments — can also work strongly in your favor.
A Loan-to-Value ratio for a property is equal to all mortgages on a property divided by the appraisal value of the property. If you own a home worth $1,000,000 and get a new first mortgage for $750,000 then your LTV ratio is 75% (i.e., 750,000/1,000,000)
Most banks and other A-Tier Lenders can loan up to 95% LTV provided that the borrower has a good income and credit score. Most non-bank lenders can lend up to 75% LTV but can overlook income and credit issues.
How to Get the Lowest Private Mortgage Interest Rate
To get the best interest rate for a private mortgage a homeowner will need to meet at least three criteria. The first and probably the most important is a low loan to value ratio (LTV). A low LTV means it is a low risk mortgage and therefore should get a low interest rate. Second is the income of the owners. If the homeowner can meet all their financial obligations then the lenders will be more confident that the borrower can make their payments. Third is the credit score. A high credit score means you can pay all your bills and have a low chance of missing payments.
In Canada, “good credit” usually means a score of 700 or higher (900 being the highest possible score). Scores between 550 and 700 are fair, and you can often still get a mortgage from a bank or credit union with such a score, albeit at a higher interest rate. Scores below 550 are considered poor. Many private lenders will offer poor credit mortgages, high-interest, short-term mortgages specifically designed for those with credit too poor to get a loan from a bank. However, the higher your credit score, the lower your interest rate can be.
It is important to know that while mortgage approval is mainly based on LTV, other factors can influence private lending interest rates. It’s always a good idea to talk with a private lender or experienced mortgage broker before applying for a mortgage so you can understand what you can get approved for at your current credit rating.
For private mortgage lenders in Ontario the most important metric is the amount that is being borrowed relative to the value of the property. This metric is known as the Loan-to-Value value ratio. The closer this ratio is to the maximum the higher the interest rate will be. In Ontario the most someone can borrow is up to 75% of the appraisal value of the property.
|Amount Borrowed (LTV Ratio)||Expected Interest Rate for Ontario|
|Borrowing 75% of the property’s value||11.99%|
|Borrowing 65% of the property’s value||9.49%|
|Borrowing 50% of the property’s value||8.49%|
What Are Some Reasons for Needing a Private Mortgage?
When applying for a private lender mortgage you will be required to state why you need the money. Private lenders are usually quite 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. Many people juggle multiple types of debt at once — for example, you might have a mortgage along with a significant amount of credit card debt, or outstanding student loans as noted above. Since a mortgage and student loans are owed to different collectors, you may find that you’re having to keep track of multiple debt payments each month. A mortgage from a private lender can be enough to pay off what remains on your mortgage as well as your student loans. Once you’ve paid off these amounts individually, you’re still in debt to your lender, but you should only have to worry about a single sum each month. 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 who have been turned down by banks.
Fast Financing from Private Lenders
What happens if you are faced with a sudden emergency expense, such as home or automotive repairs resulting from a flood or accident? If like many Canadians, you lack sufficient savings to cover an expense of a few thousand dollars while maintaining regular bill and mortgage payments, the most obvious options are taking out another loan, or deferring payments for your existing mortgage.
Both these options have merit, but what if you need the money fast — faster than banks can provide it?
The major banks in Ontario are required to follow a comprehensive and time-consuming mortgage approval process. There is no possible way to have a bank speed up its mortgage process. Aside from the aforementioned reasons, this can also be an issue for property sales that require money quickly. Private lenders can provide mortgage money much faster than banks can. If required, a private lender can provide funding in as little as one day. Our network of private lenders and private mortgage companies can lend on real estate in every city and town in Ontario. Call one of our private mortgage brokers to discuss your mortgage and get money from private lenders.
Do You Need Private Mortgage Insurance?
Private mortgage insurance is a type of insurance that is designed to protect the lender in the event of mortgage default. In general, private mortgage lenders cannot get insurance on their mortgages. Since private lenders are not regulated by any major government body, there is no company willing to provide this insurance. Mortgage insurance is typically used on low down-payment new purchase mortgages, which are typically provided by banks.
In Canada, most mortgage insurance is provided by the Canada Housing and Mortgage Corporation (CMHC), which is a federally operated crown corporation. The requirements for mortgage insurance is sometimes used as a tool to control the demand for mortgages. For example, the government can reduce the number of high-ratio (low down-payment) mortgages by increasing the credit score required for CMHC mortgage insurance. The most recent set of requirements include:
- An amortization period must be 25 years or less
- For home purchases between $500,000 and $999,999 a higher down-payment is needed. The minimum down-payment must be 5% up to $500,000 and 10% for the remainder of the mortgage
- Properties valued at over $1,000,000 cannot get mortgage default insurance
There are two other companies that provide mortgage insurance called Genworth Financial and Canada Guaranty. These are private companies but are still tightly regulated by the government. The requirements for getting mortgage insurance with these companies is typically very similar to the requirements given by CMHC.
While private mortgages cannot be insured in case of default, there are still other insurance requirements. Most private lenders will require that the property be insured against fire damage and other natural disasters.
Information on Lenders in the Ontario Real Estate Market
Ontario is a province located in the southern part of Canada and sharing a border with the US. The Ontario real estate market is the subject of much political debate as the city of Toronto and surrounding cities have experienced double-digit growth in real estate prices for the past few years. Many people in Ontario are turning to private real estate lending to generate extra income. Ontario is known as an economic powerhouse in Canada and is one of the most desirable places to live in the country.
For this reason, there are also many private lenders based in Ontario who are knowledgeable about the local real estate market and who specialize in offering mortgages and home equity loans to people across the spectrum of real estate buyers — from first-time homebuyers to experienced real estate investors.
Private lenders may work independently, or as part of a mortgage syndicate or mortgage investment corporation (MIC). In the latter, multiple investors pool their money, allowing them to invest in numerous mortgages at the same time, thus mitigating risk. Private lenders who offer mortgages from their own individual capital may be less flexible in terms of who they can lend to, and the amount and duration of the mortgages.
Hard Money Loans from Private Mortgage Lenders
The term hard money lender refers to lenders that want the loan secured against hard assets such as a house or condo. Private hard money lenders operate in basically the same manner as other private lenders. They are looking for hard assets such as houses, buildings, plazas, retail stores and any other real estate. To qualify for a hard money loan you would go through the same lending process with your broker.
Hard money loans are usually short-term, lasting anywhere from a few months to a few years. Because these types of loans are dependent on the borrower’s assets rather than on their financial stability, they tend to be riskier and therefore come with higher interest fees. Many borrowers turn to hard money loans as a kind of “last resort” to pay off a mortgage that is in default, or to stop the power of sale proceedings by paying off the remaining mortgage debt.
During the application process, be prepared to provide all financial statements related to commercial or retail buildings. Keep in mind that only the value of the house or property will be considered. Hard money lending does not tend to apply to the business value.
Real Estate Financing
Private real estate financing refers to any loans or financing acquired from a private lender.
If you are trying to find financing for your house or other real estate ventures, private financing may be the best alternative. While banks and other top lenders can offer lower interest rates, high demand, stringent lending policies and a strict pre-approval and approval structure can mean that a conventional mortgage simply doesn’t suit your needs.
Private money lenders in Toronto and the GTA can provide loans up to an LTV of 75 percent. Commercial real estate financing usually requires large amounts of money and private financing can take time to complete. It’s important to plan ahead financially so you’re not stuck in a position of needing emergency financing. If you plan on opening a business or purchasing a commercial property for any reason, talk to your private mortgage broker to determine what needs to be done to qualify for a loan. Toronto private lenders can also provide information on local real estate markets.
Read Our 2021 Private Lending Guide
We’ve written the most comprehensive and up to date guide on private lending in Ontario. We cover all private lending topics from mortgage insurance to expected rates and fees.
Recent FAQ Post
How do Private Money Lenders Work?
Private lenders aren’t subject to the same strict regulations as banks. Due to federal laws, banks have to look first and foremost at an applicant’s financial history and situation. If you’re applying for a mortgage at a bank, you need to be able to prove that you can pay it back — by showing that you have a strong track record of paying back previous debts. Learn more about how Private Lending works
We Have Private Lenders in Cities & Towns Across Ontario Including
- Fort Erie
- Halton Hills
- Niagara Falls
- North Bay
- North York
- Port Hope
- Richmond Hill
- Sault Ste. Marie
- St. Catharines
- St. Thomas
- Thunder Bay