If you’ve guessed that a private mortgage is financing from a private lender, then you’ve got the foundation of its definition discovered. If that’s all you know, don’t worry! We’re here to provide you with a complete overview of what a private mortgage is, what exactly it entails, and whether it’s worth pursuing as a Buyer or offering as a Seller.
What are they?
Private mortgages are normally short-term, have more room for flexibility based on arrangements made between the Lender and Lessee, and are typically interest only payments that don’t require the Lessee to pay a chunk of the Principal as part of their scheduled payment.
A private mortgage isn’t necessarily provided by the Seller of a property, although it can be. It could be a formal institution that focuses on loans or it could be your neighbour down the road.
The lender could be anyone who has discovered the benefits of lending and has the resources for doing so. Most realize that there are some gaps in the traditional mortgages and financing from banks and public institutions that often only look at the possible mortgagee for what they’re worth and not much for whether they are capable of paying back a loan or if the property could be income generating in itself (such as a rental property that already earns more than what would be required for mortgage payments).
Typically, a lender will either be an individual, a syndicate (a group of individual lenders who pool their funds together to provide a loan), or an investment corporation, which is closest to a bank but is made up of investors providing multiple loans at one time.
What is the appeal of a private mortgage?
For a Buyer, a private mortgage could be a beneficial decision for a variety of reasons:
- They may not meet the eligibility requirements such as an income or credit threshold to get a traditional mortgage.
- The property being purchased may also be unconventional and unappealing to a bank, such as a vacant lot or abandoned business.
- A short term loan is all you require; you need something open that can be paid off more easily without stiff penalties.
Are there issues with private mortgages?
With any loan, you’re going to pay interest. Private mortgages tend to feature a higher interest rate, especially if you have bad credit or are considered a high-risk lessee. However, interest can be low as well; it all depends on your unique situation. Additionally, at the end of the term, if you haven’t made payments to the principal, you’ll still owe the entire mortgage amount back.
To answer some questions you might still have:
No – a private mortgage is not the same thing as a vendor-take-back mortgage, which is a mortgage in which a Seller transfers title of a property to a Buyer with a registered contract that sets a payment plan with interest for part or all of the purchase price. It acts as a promissory note which can benefit a Seller who wants to get a property sold but the Buyer can’t cover or isn’t eligible for a bank mortgage on the entire purchase price.
Yes – a private mortgage is still a mortgage that will be registered on the title of your property. It a just as legally binding as any other type of financing.
Interested in finding out more about private mortgages, either as a Seller or a Buyer? Our team can answer all your questions. Reach out for a conversation today!