Private mortgages have long been seen as the riskier and less attractive alternative to a traditional bank loan. In recent years, however, following the rise of interest rates and stress test requirements, many Canadians found themselves unable to pass through the strict qualifications of traditional lenders.
The private mortgage market, like any other industry, is ruled by the laws of supply and demand. Recently, private mortgages have gained popularity amongst buyers and lenders alike, namely due to their flexibility in requirements, and allowance for quick access to funds. As big bank mortgages became less accessible , the demand for non-traditional loans rose sharply, which in turn increased the supply of top private mortgage lenders in Canada, as new entrants sought to take advantage of this growing market.
In Ontario, private mortgages are subject to the Mortgage Brokerages, Lenders and Administrators Act (MBLAA), which regulates mortgage brokerages, mortgage administrators, and mortgage lenders. The MBLAA sets out requirements for licensing, advertising, disclosure, and dispute resolution processes to protect consumers and ensure the integrity of the mortgage lending industry.
Within the private mortgage industry, there are pros and cons involved for both lenders and borrowers. One major pro for lenders is that private mortgages often have higher yields than other types of investments. Here are some common pros for borrowers:
For lenders, one major con associated with private mortgages is the increased risk of borrower default. For borrowers, the most commonly-listed cons include:
Several economic factors and market conditions influence mortgage affordability in Canada, affecting both homebuyers and lenders. Key driving forces include:
As the Canadian economic landscape continues to shift, we may see changes in mortgage affordability following projected rate cuts or the inflow of promised affordable housing supply. In the meantime, however, many Canadians are choosing to forego waiting on the sidelines until traditional mortgages are accessible again and opting for private mortgages instead.
The best risk-mitigation strategy boils down to conducting due diligence. For borrowers, this means carefully assessing your financial situation and ensuring you can afford the terms of your private mortgage, including the interest rate and repayment schedule. Seeking independent financial advice and legal counsel can help you understand the terms of the loan and any potential risks involved. Additionally, you could consider obtaining title insurance to protect against title defects or ownership disputes that could affect the property securing the mortgage.
For lenders and investors, mitigating risks involves conducting comprehensive risk assessments of potential borrowers and properties, including assessing creditworthiness, property valuations, and market conditions. Implementing rigorous underwriting standards and stress-testing scenarios can help identify and mitigate potential risks before extending credit. Diversifying investment portfolios across different asset classes and geographic regions can also help spread risk and minimize exposure to any single borrower or property. Moreover, maintaining adequate reserves or liquidity buffers can provide a cushion against unexpected losses or market downturns.
Overall, proactive risk management strategies, thorough due diligence, and diversification are essential for mitigating the risks associated with private mortgages. To learn more about private mortgages and receive personalized advice on how to best approach the current market, you may want to consider working with a Clover Mortgage broker. Contact us today to schedule a free consultation!
Here are some potential cons to consider:
People may choose private mortgages over traditional ones for a number of reasons, despite facing higher interest rates. One common reason is that private lenders often provide more flexibility in their lending criteria compared to traditional banks, making it possible for borrowers with lower credit scores or unconventional financial situations to secure funding. Additionally, the process of obtaining a private mortgage can be faster and less bureaucratic than going through a traditional lender, which can be particularly appealing for individuals or businesses in need of quick access to funds. Private mortgages also provide an alternative for those who may not qualify for traditional loans due to factors such as self-employment, non-standard income sources, or unique property types. Moreover, some borrowers may prefer the confidentiality and personalized service offered by private lenders, as well as the ability to negotiate terms directly. Overall, people turn to private mortgages for their flexibility, speed, accessibility, and tailored solutions to specific financial needs.
As of April 2024, private mortgage rates range from around 10% to 18% on average, whereas bank interest rates typically hover around 7%.