Looking to finance your dream home or real estate investment? The two best routes are either to go with a bank or private mortgage lenders. Homeowners and the self-employed have long believed the only way to get out of debt quickly was by taking a loan out from their bank. This was because potential home owners would access mortgages exclusively through banks, as private mortgage lenders had an air of stigma. However, this is not the case, they are simply an alternative when you need money fast without referring to your credit score. The Canadian federal government has loosened restrictions on private mortgage lenders, which has created a ‘renaissance’ in the industry, thus evening the playing field with the big five Canadian banks. Before you set out to secure funds for your business or refinancing your home, take note below as we layout the three biggest differences between private mortgage lenders and banks.
Perhaps the most important difference is banks are insured institutions and actually covered by the federal government in case of losses, while private mortgage lenders can either be insured or not insured. Often those uninsured require collateral such as your home because there is no credit check. This is why banks require at least 20% down payment on a property when signing your mortgage agreement, however since they are insured by the government, your interest rates will be low. A private mortgage lender is an alternate solution if you have bad credit and/or cannot make a down payment of 20 percent on the value of the property, often requiring as little as 5 percent. Mortgage insurance is mandatory in Canada for down payments under 20 percent, which requires you to pay a premium that the lender will give you upon application.
Banks take measurable risks and in 2016, they are as tight as ever. The biggest factors to receive a mortgage from a chartered bank is security of income and a clean credit score, however you are much less likely to qualify if you’re self-employed. This has created terrible frustration for millions of Canadians that are looking to consolidate their debts. In 2015, The Globe & Mail reported that self-employed now represent about 15.6 percent of all working Canadians, making private mortgage lenders the most viable option. Private lenders do not check your credit score or income like the banks, however they do take into account available capital and the equity on your home.
Banks are able to withdraw funds from the numerous accounts that allow for cheap withdraw; this is why they are able to charge low interest rates for long-term mortgages that may take 30 years to pay off. Private mortgage lenders are taking on much more risk as they are often funded by a pool of investors. This means the money they hold is especially valuable as it is limited and cannot receive insurance from the government if someone defaults on a mortgage loan. Expect to pay much a much higher interest rate with private lending institutions because of this, as they want to have quick payment periods, usually between 1-2 years. To find the right mortgage for you, see how you can quickly apply for our loans at North Creek Financial here.