Private Mortgage Lender Rates
If you’re looking to tap into the Ontario private mortgage lender market, you might be wondering about interest rates. Although private mortgage lenders will almost always have higher rates than the major banks, borrowers can expect some variance. In this piece we’ll explore how private mortgage lender rates are determined and how you can score a better rate!
Why are private lender rates higher than major banks?
Firstly, it might be helpful to understand why private mortgage lenders typically charge higher interest rates. Major banks and credit unions lend based on an approved and regulated formula that takes into account a borrowers down payment, equity, debts, income and credit score among many other factors. They will also look at what is called your Debt Service Ratios in the form of Gross Debt Service (GDS) and Total Debt Service (TDS) to determine the best mortgage rates. Assuming a borrower has been turned down for a mortgage by the major banks or credit unions, they’re likely falling short in one of these major areas. From a private mortgage lenders’ perspective, this increases the risk level and must be factored into the mortgage interest rate to justify the added risk to the private lender.
How are private lender rates and fees determined?
Private mortgage lenders are mainly lending against the equity in a property. This means that if the borrower is unable to meet their mortgage payments, they will recoup their funds and associated fees from the equity in the property. In most cases, private lenders will lend a maximum of 85% Loan-to-Value, meaning there is at least 15% equity available in the property above the private mortgage. Another factor that will determine the interest rate is whether the private mortgage lender is sitting in first or second position. A first position lender has the first right to collect their debts from the sale of the property in the event of default, which puts them in a better position to recoup their funds. A second position lender can only access proceeds from the sale after the first position lender has been made good on their debt. If there are no extra funds, the second position lender may not be able to fully recoup their money. Following from this, the rate will be higher for a second position private mortgage vs a first position. Beyond the equity available in the property, a private lender may consider your credit score, profession and plan to repay the funds as a part of the rate determination.
How a borrower can get the lowest private mortgage rate?
Getting the best private mortgage rate will come down to two major factors: the borrowers’ Loan-to-Value and the mortgage position (first or second). In addition to these major factors, your credit score, income and profession may be considered. For example, if a licensed contractor buys properties to flip for a profit, the property is in a major city, the contractor is taking out a first position private mortgage, putting a 20% down payment, has good credit and a history of flipping properties for a healthy profit; they might be offered a private mortgage rate as low as 6%! Another way to make sure you get the best rate is to get quotes from more than one private lender and source. Each private lender might have different criteria and risk appetite, so it’s not unusual to find rate differences from one private lender to another. This is why it's always better to shop around.