Recent Trends In Private Mortgages

Written by on July 28, 2013 in Money - No comments | Print this page

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mortgage-brokerPrivate mortgages are becoming an increasingly popular method for residents in Canada to borrow money.

Typically, people search out a private mortgage after they have been denied by the bank for a traditional mortgage.

Although these loans can be an alternative method to securing a mortgage, they also come with a higher interest rate, and you may need to pay some extra expenses, such as a processing fee.

However, for many Canadians these type of mortgages have become a lifesaver and helped them receive the funds they need. These loans are also great for the lender because they can make a good short-term profit.

Why People Turn to Private Mortgages?

Due to their higher costs, people should not consider a private mortgage until after they have been denied for a more traditional loan. The lender of a private mortgage is usually more than happy to process the mortgage if it can be established that there is enough equity in your home.

This process is a good option for some people, but it is not right for everyone. Below is a list of the three main reasons why people turn to private mortgages

  1. This type of mortgage is typically very quick and easy to obtain and does not require the amount of paperwork as a tradition loan.
  2. Private mortgage lenders do not use your credit score when determining if you qualify for the loan. This fact has caused these loans to be sometimes referred to as “bad credit mortgages.’
  3. These mortgages usually have a very quick turnaround time of just about one week, which is a lot better than the month of more time period that it take to process a standard mortgage.

Additional Cost Associated with a Private Loan

Before applying for a private loan, you should realize that there are some additional expenses you may be required to pay. Despite this fact, thousands of people across the country are deciding this is the right option for them.

This is especially true for people who are self-employed, those with low credit scores, and those looking for fast and easy loan. Below is a list of several of the additional costs you may be required to pay.

  1. Higher Interest Rates: A private loan will most likely have higher an interest rate than standard mortgages. The exact percentage of your interest rate will depend on several factors, including the type of property, where the property is located, loan-to-value ratio, net worth, your gross income, and amount of down payment.
  2. Appraisal: In order to get a mortgage, you will probably need to have your home appraised. Typically, the borrower is responsible for this fee.
  3. Legal Fees: It costs about $1,500 to process the entire mortgage, including the draft and closing. You will most likely be responsible for this cost.
  4. Property Inspection: Sometimes a home inspections is also necessary and must be done prior to the mortgage being finalized. You also may be responsible for this added expense.
  5. Brokers Fees: Obtaining a private mortgage through a broker is highly recommended because the broker knows the process well and may be able to get you lower interest rates. However, after the loan is processed, you will be responsible for paying the broker his/her fees.

New Rules Imposed by the Government

After the crash in the housing market experienced in the United States in 2008, the Canadian government took some steps to try to prevent the same downturn from occurring in Canada. A breakdown of these new rules are listed below.

  1. The maximum amortization timeframe has been lowered from 40 years to 25 years. Unfortunately, this often makes the monthly mortgage payments higher.
  2. The gross debt services has been capped at 39 percent, while the maximum for total debt service ratio has been set at 44 percent.
  3. The maximum price that a property to be insured can be purchase for has been set at one million dollars.
  4. The highest percentage for home refinancing has also been reduced from 95 percent to 80 percent.

These changes in the law, especially the maximums set for amortization and the debt service ratio, has made it very difficult for many people to obtain a mortgage through a bank.

Many people, who before the new regulations would have easily received a bank mortgage, are now being denied. This has increased the demand for private mortgages. The good news is that interest rates are at their lowest point ever, making the loans more affordable.

However, as the demand for these loans increases, the interest rates may increase too. As long as traditional mortgages remain difficult to obtain, the popularity of private loans will remain high. This makes investments in private loans a great option for investors.

Jack Dean works full time as a as a writer and blogger. He has also worked as a mortgage specialist with various clients in facilitating their mortgage.

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