When it comes to buying in Canada’s hot housing market, your first step (after saving for a down payment) should be to get pre-approved for a mortgage. When you get mortgage pre-approval, you’ll go through either a mortgage broker (who will shop your application around to get the best rates) or directly from a bank or credit union (also called A lenders). Your mortgage pre-approval will help you determine how much money you could potentially borrow for your mortgage, which you can combine with your down payment to determine your maximum purchase price.
Unfortunately, with mortgage restrictions tightening regularly, many Canadians – especially those living in expensive cities like Vancouver and Toronto – find themselves unable to obtain a mortgage through A lenders that are big enough to get them onto the real estate ladder. If you find yourself in this situation, you still have options beyond traditional lenders. There are other lenders in Canada, and these are known as private lenders.
What is a Private Lender?
While traditional banks and credit unions are known as A lenders, they aren’t the only entities in Canada that lend money for buying homes. Private lenders are small companies or individuals who offer mortgages. The mortgages that private lenders provide are a little different in a few key ways. Most importantly, they are usually short-term, usually between one and three years in length, and interest-only, which means you’ll only have to pay the interest that accumulates on the debt. Finally, private lenders use different criteria to qualify you for a mortgage, which means that if you don’t qualify for a mortgage through an A lender, you may still be eligible through a private lender.
Private lenders can be an option for Canadians struggling to qualify for a mortgage, but whose financial circumstances may change in the short term, allowing them to refinance through an A lender in the future.
What is an A Lender?
An A lender is a traditional lender and could be one of Canada’s major or minor banks or any of the dozens of credit unions that operate across the country. You can apply for a mortgage directly through a traditional lender or by using a mortgage broker. A traditional lender is regulated by the federal government, which means they must follow federal rules and restrictions when processing your mortgage application. Traditional lenders will only lend to borrowers with good credit scores, reliable employment income, and at least a 5% down payment.
Differences Between Private Lenders and A Lenders
A loan from a private lender is very different from a loan from an A lender. Here are the main differences you can expect:
- Interest rates: Private lender mortgages usually have higher interest rates to offset the increased risk of lending to someone who doesn’t qualify for a traditional mortgage. Expect interest rates as high as 10-18%.
- Fees: While many traditional mortgages have fees, private mortgages have higher than average borrowing costs. Expect to pay fees ranging from 1% – 3% of your total mortgage amount.
- Terms: Most private lenders offer mortgage terms between one and three years in length, but some offer longer terms. Private lender mortgages are often used as a short-term bridge toward a longer-term A lender mortgage.
- Qualification criteria: Private lenders rely more on your property’s value and marketability and less on your credit score and financial profile to determine whether you qualify for a mortgage.
Here’s a handy comparison table to outline the differences between A lenders and private lenders.
|A Lenders||Private Lenders|
|Type of Organization||Banks, credit unions||Individuals, companies|
|Loan term||1-5 years||1-3 years|
|Payment||Principal and interest||Interest only|
|Qualification Criteria||Credit score, income||Property value, marketability|
|Regulations||Yes, federally regulated||No|
Who Should Get a Private Mortgage?
For most Canadians, a mortgage through a traditional lender is the right choice. That said, there are some instances where a private mortgage might make sense, including:
- If you’re looking to purchase an unconventional property
- If you need financing quickly and can’t wait for the approval process involved with a traditional mortgage
- You have bad credit or no credit
- Your financial circumstances will change soon, and you only need a short term loan allowing you to refinance when the term is up
- Your income isn’t verifiable
What to Consider When Evaluating a Private Lender Mortgage
If you’re considering working with a private lender, keep in mind that they are not federally regulated, so you must read the documentation provided by the private lender. It would be best if you also had a real estate lawyer review the loan documents. As you are reading through the loan documentation, make sure these fundamental questions are answered:
- How high is the interest rate?
- What are the penalties for missed mortgage payments?
- What are the penalties if you want to get out of the mortgage early?
- Can you prepay your mortgage or make lump sum payments?
- What is the monthly mortgage payment, and can you afford it?
- What fees are associated with this mortgage?
The bottom line
While Canada’s real estate crisis has pushed many Canadians out of the housing market or forced them to reconsider their homeownership goals, traditional, federally regulated A lenders are still the gold standard for mortgages in Canada. That said, if you’re considering looking elsewhere for a mortgage with terms that will help you buy a home, a private lender may be able to offer a product that will help you realize those dreams. The critical thing to remember is that these lenders aren’t federally regulated. Hence, the onus is on you to do your research and ensure you can afford your monthly mortgage payments at the interest rate and terms offered by your private lender.