Loan Sharks. Greed. Crooks.
These are just a few words I hear from people when I mention “Private Lending” as an option. Sadly, it’s usually because they don’t understand it, or have been burned by someone already. Again though, usually due to lack of education from the beginning.
For many of you, I already lost you when I said “Private Lending” so I think it’s time I explain it in detail.Private lending has been around since the beginning of time and now that the mortgage lending guidelines have changed so dramatically in Canada, its becoming more and more common place.
A private lender is a person or business that loans money to someone who may otherwise not to be approved the conventional way typically due to income or credit deficiencies. Private lending, as it relates to my profession, would be someone loaning the money to a borrower secured by a property as a ‘Private Mortgage.’
The position of the loan is very important. Put simply, the position of the registered loan defines who gets paid before whom when the home sells and ultimately helps determine the overall risk. If a mortgage is in 1st position, it means there are no liens before it and when the home is sold, they are the 1st to be paid out. After that lender is paid, they will then pay the 2nd mortgage lender, with any remaining funds going to the homeowner.
Typically people are fine with going to a private lender for a 1st or a 2nd mortgage since they want to buy a home and are in, or have gone through, some financial hardships. The disconnect comes when someone hears the rate they will be charged then believe its outrageous. But is it?
Interest charged on a private 1st mortgage is around 7% - 10% depending on the deal specifics, where a 2nd mortgage would be roughly 9%-14%. Both loans will also come with a lender fee and are usually interest only loans running for 1 year as the most common term length.
Now when you hear 12% for a mortgage, you think "That is ridiculous, who would ever pay that rate?" Well, you for one. You would and already do pay that. Unless you are debt free, which most Canadians are not, it’s likely you have or had one or multiple credit cards or lines of credit that are right now, carrying a balance. A balance that is being charged at 12%-29% interest. However, you don't see it that way. When you signed up for the credit card you didn't even give it a second thought, but it’s no different. The fact that one is labelled a mortgage, and one is an unsecured debt somehow messes with your mind making you think there is a difference. Debt is debt. Period. It’s that simple.
Its funny how you will stand up to those nasty, crooked private lenders, who you know are taking advantage of you, but love and appreciate your good friend Visa because they are kind enough to give you travel rewards. In fact, an 11% 2nd mortgage used to pay out all the unsecured debt not only lowers the rate on the currently unsecured debt, consolidates all the payments into 1 smaller payment allowing you to organize your finances better, but will also boost your overall credit score. The score that was initially so low that you needed to go to a private lender in the first place. Now, with no debt on your credit bureau, the score rises dramatically, and in a year or two, you pay out the 2nd mortgage with a new A+ mortgage. You now have 1 mortgage at 'A' rates and no unsecured debt (assuming you haven't decided to max the cards out again). You are in a much, much better place than you were a year prior. All because of that "Loan Shark".
Keep in mind, the lenders could be you or me. They can be someone who just isn't getting a good return in the stock market or their mutual funds and want to lend on real estate. You wouldn't lend your hard earned money to a perfect stranger, with poor credit or that doesn't earn enough money in a hope to earn 5%. Would you? Understand that there is a real need for private lending. In the majority of the cases, the lender earns a great return on their money, and you get yourself in a better position financially or in the home that you desperately wanted. It’s a win/win. Are there "bad people" out there who want to take advantage of you? Yes, of course there are, but I wouldn’t lend my money to them ;) (see what I did there?) My point is, there are people on both sides of the deal that will take advantage of a situation so always do your homework, and ask questions. Review it with the lawyer. Ask your mortgage professional if this is right for you and always have an exit strategy whether lending OR borrowing private money.
Private lending solves an immediate problem and should only be looked at when cheaper options have all been exhausted. They aren't meant to be long term solutions and both parties should benefit from the transaction, not just the lender.
So, maybe it’s time you contacted your mortgage professional and see how private lending may work for your situation. Lucky for you, I happen to know one.:)