Here’s the scenario. You’re three-quarters of the way through your new cottage construction in Muskoka, and you’ve gone over budget. Your bank, who already loaned you money, has told you that you don’t qualify for additional funds. How will you fund the rest of the project?
One option is to use a private lender.
Now that interest rates are on the rise and new mortgage regulations are in effect, it’s becoming a little more difficult for some Canadians to get mortgage approval from traditional lenders, particularly individuals who are self-employed, have a low (or non-existent) credit rating, or have maxed out other options. Even if you’re perfectly capable of repaying the loan, most institutions require you meet very strict criteria and prove that you are able to do so. This means that private mortgage lenders are gaining momentum as an alternative to banks, credit unions, and other regulated mortgage lenders.
If you’re considering the private lender route, here are a few things to consider before you proceed:
Quick approval and turnaround time
The primary benefit of working with a private lender is the fact that your approval is generally pretty quick. The time needed to approve and process your mortgage is also much quicker than the timelines involved with a traditional mortgage lender.
Higher rates
Despite the quick turnaround, it’s important to be aware of the fact that private lenders often charge rates that are quite a bit higher than the rates offered by banks, credit unions and other regulated mortgage lenders. In fact, private lenders typically charge double the rates that are offered by traditional lenders.
Additional costs
In addition to higher rates, there may also be additional costs associated with a private lender loan. Even a 1 percent finder’s fee charged by the lender, and another 1 percent charge from the lending institution (Dominion, Olympia, etc.) can add up, especially when other administrative and legal fees are tacked on. If you’ve borrowed $400,000 from a private lender, for example, you can be charged up to $8,000 in non-refundable finder’s fees up-front.
Short term loans
Another thing to consider is that most private lenders aren’t equipped to manage a loan or mortgage the way that banks or credit unions do. As a result, private lenders can typically only offer a loan for a year or possibly two.
Few regulations in place
Finally, many private lenders are not controlled or regulated by governing bodies, meaning they have more freedoms and are not as accountable compared to regulated, traditional lenders or certified mortgage brokers.
If you are thinking of talking to a private lender, make sure to work with one who is reputable, doesn’t charge finder’s fees, and offers rates at no more than 2 percent higher than the going commercial rate. It’s also a good idea to consult a real-estate lawyer before signing anything. An experienced real estate lawyer will carefully review the documents to make sure you’re fully informed and there are no surprises. They will also advise you on any red flags or offer other available options to consider.
If you’re in the market to buy a home, cottage or other property in Bracebridge and the Muskoka area and you’re not sure about where to start, give Ares Law a call today at (705) 645–8743 with any questions you might have. Bernie Keating and his team are always here to help protect you and your investments; we’ve got your back.
