• Private Lending has become a hot topic of late! Due to a variety of reasons, borrowers may need private loans due to insufficient income to qualify for a mortgage, debt consolidation, damaged credit and even people looking to borrow money against their equity. However in many cases the existing lender may not be willing to lend against that equity and therefore people turn to private loans for a solution. But it’s not always that easy or clear on how they work so let’s unravel the private lending world.

    In Part 1, I will speak about the borrower and private lender. In Part 2, I will speak about how you as an investor can loan your money in private lending as an alternative to owning property.

     

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    As already indicated above there are many reasons why a borrower may seek a private loan. For example my current client only has a small down payment and with rising house prices is getting locked out of the market due to lender’s LTV requirements. Even with B lenders, who have lower restrictions than the typical A lender, it is hard to make the deal work above 75% due to derogatory credit.

    Thus by seeking a private loan, we can do a few things; it provides a LTV up to 85% and sometimes 90% depending on lender, with interest only payments and is open after 3 months so that if the client can find an alternative solution they are not locked in for the whole term. It also provides the client an opportunity to clean up their credit in that time and move up the ladder to lower interest rates.

    Most private lenders will lend behind the first mortgage, thus it is called a second mortgage. Rates are much higher than a B lender and are based on a few things, such as location, LTV and reason for loan.

    Location matters to the lender because if the borrower defaults on the loan, they will be in second position and therefore behind other creditors to get their funds back. If the property does not sell or is in a location that is harder to sell than the risk of getting any money back is much higher than if it is in a location that is in demand.

    LTV matters to the lender because even though they are lending to a borrower in most cases (not always the case so see below) that has a higher risk profile, they want to make sure that the borrower has some skin in the game and that the entire loan is not sitting on the shoulders of the lenders.

    Reason is also a concern. If the borrower is taking the second loan because they have had derogatory credit before, such as a bankruptcy or consumer proposal or even frequent late payments, the lender will most probably charge higher interest rate and fees than a borrower who does not have a risky profile.

    As mentioned above many people also seek private loans because they may be in a fixed mortgage and to break the mortgage and access the equity they may be looking at a high penalty to break the mortgage. Instead they can take a 1-year private loan (albeit at a higher rate than a HELOC) and complete the renovations they need to make. As the loans are usually open for repayment after 3 months, it can sometimes be a more attractive option, as the private lending world does not require as much documentation as the typical lender will.

    Are you in need of a private loan or second mortgage? Reach out so I can find you a solution!