There was a time when private lending meant borrowing from wealthy individuals. For instance in a scenario where you buy a house, a wealthy individual would lend you the money and you pay him back in monthly payments.
Now private lending is commonly used to refer to lending by mortgage investment corporations (MICs). The government decided to make investing in real estate and mortgages simpler for the average Canadian and to stimulate more private money into the Canadian mortgage market. Their solution was the MIC.
MICs take money from investors and lend them out to people who need it. The profit from the mortgage loans are given back to the investors minus the operational and administrative cost of running the MIC. This means borrowers are dealing with professional, government regulated organizations.
What is similar in both types of private lending is that the lending guidelines are a lot more flexible than banks. Their key concern is the amount of money you need to borrow compared to the value of the property used as collateral. Credit scores, income, immigration status play a much smaller and sometime negligible role in determining whether someone would qualify for a private mortgage. This varies between private lenders.
Banks are well marketed, well-positioned, well-capitalized institutions that have the power to choose the segment of the market they want to lend to. Private lending fills a portion of the segment not covered by the banks. Though they may hold hundreds of millions in loans, they are much smaller than banks and are much more nibble in terms of adjusting to changing financial environments. They lend for residential housing, commercial property and construction purposes.
The rates for private lending is usually higher and like all businesses that are free to set prices, it’s prices are actually set by the market. Independent mortgage brokers form part of this mechanism. By shopping the deal around, MICs that charge too much or have poor terms have to adjust or be forced out of the market. Currently, competition is stiff. Private lending rates are as low as 4.5%. To put this into perspective, you can easily walk into one of the major banks today and pay over 5% for a cash back mortgage.
If private lending interests you, contact us. We will do an assessment to see if private lending is right for you. If we can get a mortgage cheaper else where, we will. We are independent. We have access to over 200 lenders. We will take you where it will benefit you most. Consultation is free and confidential.