Practice Tip: Talk To Your Clients About Private Lending

Advice from your Mortgage Broker Practice Advisor, Gary Siegle

Private lending is becoming increasingly popular among Canadians looking to secure loans to buy, renovate, or refinance a home.

Canada’s current mortgage rules, including the stress test, have made it more difficult for some people to get mortgages from traditional lenders, particularly for those who are self-employed, first-time home buyers, new to Canada, or have credit challenges.

As a result, more buyers are turning to private lenders.

Private lenders include mortgage investment corporations, investors who pool their capital (syndicated mortgages), or individuals lending their own money.

For your clients who are unable to secure a traditional mortgage from a bank or credit union, private lenders could offer an alternative. This alternative might be especially useful for those clients whose financial situation may have recently changed due to the current COVID-19 pandemic.

However, if your clients are considering using a private lender, there are things you should discuss with them to ensure they understand:

• property-focused approval—in contrast to traditional mortgages, private mortgages often look first at the property value and location—the client’s financial situation is secondary
• higher rates—your clients should be aware that because private lenders are taking on higher risks, they usually charge higher mortgage rates
• additional costs—in addition to higher interest rates, private lenders charge a fee. Talk to your clients about how they plan to cover these lender fees, along with administrative and legal fees and broker commissions.
• foreclosure—you should also discuss with your clients the reality that private lenders can be quicker than banks to foreclose if they fall behind on their mortgage payments
• short-term loans—many private lenders typically only offer a loan for a term of a year, or possibly two. Clients that are unable to obtain bank financing at renewal time may end up in a cycle of these short-term, higher cost mortgages.
• interest-only loans—some private lenders offer interest-only loans, where the monthly payments are applied only to the interest. While interest only loans have lower payments than standard loans, at the end of the loan’s term, your client will find themselves no further ahead, with the full balance still outstanding.

Whether you’re a real estate or mortgage professional, you may have clients asking you about private lending options. If traditional financial institutions and mortgages aren’t the right fit for them, for whatever reason, working with a private lender is an available option. Helping your clients understand how these options may differ from traditional mortgages is important in order to protect your clients’ best interests.