Protect Yourself When Using Private Lenders

By : Edi Marinescu

Are Private Lenders Your Only Option?

Emergency expenses happen and they are often inevitable. If an accident happens and your home floods or if your car is need of major repairs, how do you cover yourself if you are financially constrained? Many Canadians, especially after having survived the pandemic, lack the necessary funds to cover extra expenses while continuing to service their recurring bills and to cover their mortgage payments. If you are one of them, your best option, aside from deferring payments on your mortgage, is to apply for a loan to sustain your current lifestyle.

What if you have already deferred your payments and can no longer continue to do so, would obtaining a loan from a bank be possible? Would it be time-effective? Would it be the best overall option for you?

Major banks often abide by long and strict lending guidelines which can also bind them to your other banking products such as your credit card and lines of credit. In case of default on any of your trade lines, when you reach the limits on these, due to renovations for example, all your trade lines with that specific bank could suffer the consequences. Your leverage would then be affected and eventually your credit score could drop significantly. This is one of the disadvantages of collateral charges on mortgages.

Remember, applications with banks especially in turbulent times often take longer than anticipated to be approved. Therefore, this can be troublesome not only if you are in need of cash, but also if you require money for the sale of a property. Private lenders, on the other hand, are able to finance mortgages in as little as 24 hours. Our vast network of multiple private lenders, from individuals to institutions, are eager to lend in almost all cities and towns throughout Ontario.

Know the Risks of Obtaining a Private Loan

Private lenders are more flexible than traditional financial institutions due to their simple structure. Private individuals lend their own money or pool their money together while creating their own restrictions and conditions about how to lend their money and to whom. Since investors agree on the rules of the private mortgage, they can take a higher risk with borrowers to help them reach the qualifying stage with financial institutions in due course. This higher risk is usually met with a higher interest rate applied to the entire amount loaned to the borrower and deferred repayment.

To us mortgage brokers, private loans generally serve as a short-term option for borrowers who are unable to tap into other sources of funding while learning how to improve their financial health. To borrowers, when used accordingly, private funds can be crucial in either saving a deal, a home, or lives in the long run. Essentially, private loans allow borrowers to buy time so they can improve their credit score, liquidate debts, or increase the value of their property through renovations.

Before signing up for a loan with a private lender, consider the following aspects:

  • Approvals are property-focused rather than based on the your repayment ability and therefore, in order to qualify, private lenders first consider the value and location of the property before the financial situation
  • Interest rates are often higher as private lenders take on additional risks
  • Extra lending and brokering costs could be added to the legal and administrative fees
  • In case you fall behind on your mortgage payments, private lenders may be faster to act in foreclosing on your property than a traditional lending institution
  • Loan terms are often shorter, ranging between one to two years on average, which can create complications for you if you are unable to secure financing with an institutional lender

Private loans can be set up as interest-only, where the monthly payments are only applied to interest payments, not to the loan principal as well. Since these loans resemble higher-scale investments, it can be detrimental to your financial health if you do not have a precise exit strategy. The most common way of ensuring a strong exit plan is done through conscious budgeting where all available options are taken into consideration. Budgeting is an important aspect of improving one’s financial health and crucial in making the most of a private loan, without tapping into the risk of losing the property or worse, going bankrupt.

Keep in Mind

Obtaining a loan through a private lender can be extremely advantageous, but if it is not used with attention and planning, it can be detrimental to your financial health and more. This is why assuming a role of responsibility and accountability for a better version of you to benefit from working with private lenders is key.

Your most important goal is to know what you want to achieve in real estate and work with a team of professional mortgage brokers, like us at Mortgage Capital Investment, to assist you in aligning with that version of you who prospers from having vested time in learning how to build wealth.

Contact us today and we would be glad to find you options for your investment plan.

Lowest Residential Mortgage Rates in Canada*

Term OUR RATE Bank Rate
3 Year Fixed/ 25 yrs 4.54% 4.79%
3 Year Variable/ 25 yrs 3.60% Promo 3.96%
5 Year Fixed/ 25 yrs 4.69% 4.89%
5 Year Variable/ 25 yrs 3.70% Promo 4.09%
5 Year Fixed/ 30 yrs 5.34% Promo 5.49%
5 Year Variable/30y 4.20% 4.70%

Updated: July 20, 2022

* Current promotion rates may provide an additional 0.05% discount or may be anytime discontinued at the Lender discretion . Rates may vary between geographic regions and the posted rates on this website may not be available in your area. Please contact our MCI office for more details and current promotions.

LOWEST REGULAR RATES IN CANADA*   * Current promotion rates may provide an additional 0.10% discount. Rates may vary between geographic regions and the posted rates on this website may not be available in your area. Please contact our MCI office for more details and current promotions.

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