Private mortgages, also known as private money loans, are a form of lending that is becoming increasingly popular in Canada. One of the main reasons borrowers turn to private money lenders is the ability to obtain a higher loan amount compared to what traditional lenders may offer.
When purchasing a property in Canada, the minimum down payment for a primary residence is 5%. However, the minimum down payment for a residential income property that is one to four units is 20%, while the down payment on a multi-family or commercial property generally starts at 25%. Refinancing a property through traditional lenders usually caps the maximum loan to value (LTV) at 80% for residential properties and 75% for multi-family and commercial properties. In some cases, the LTV may be as low as 15% with the Canada Mortgage and Housing Corporation (CMHC).
Private money lenders may be able to offer higher loan amounts than traditional lenders on a deal-by-deal basis. They take on a higher risk by doing so and compensate for that risk by charging higher interest rates or fees, or a combination of both. Institutional private lenders may offer private loans to investors flipping properties with a loan-to-value ratio of close to 90%.
When considering private money loans, it’s important to understand the risks and benefits associated with this type of lending. Private money loans can offer borrowers a faster application and approval process, more flexible lending criteria, and higher loan amounts. However, private money loans also come with higher interest rates and fees, making them a more expensive form of borrowing.
Summary
Private money loans can be a useful tool for borrowers seeking higher loan amounts than traditional lenders may offer. However, borrowers should carefully consider the risks and costs associated with this type of lending and ensure they have a plan to repay the loan on time.
