Over the past year, Canadian homeowners have been facing the fastest and largest increase in interest rates in over four decades. This steep rate hike has coincided at a time with historically high levels of debt and even higher cost of living, leading some to make desperate financial decisions.
Non-profit credit counselling agencies like Credit Canada have been hearing from clients who are struggling with mortgage payments and are worried (both now and for the future) about losing their homes due to rising interest rates. They may, therefore, turn to private mortgages.
A private mortgage provides consumers who are unable to qualify for a traditional mortgage from banks, credit unions or trust companies the financing to buy or refinance a home. This loan comes from an entity not connected to a financial institution–such as individuals, syndicates, and mortgage investment corporations.
Borrowers may turn to private lenders as an alternative source of funding for various reasons, including poor credit, high debt, irregular income, or difficulty providing proof of income. But before doing so, it's important they consider the costly risks of a private mortgage as it should only be a short-term plan.
Be informed when considering a private mortgage
A private mortgage may be suitable for your immediate needs. But before you commit, Financial Services Regulatory Authority of Ontario (FSRA) Executive Vice President Huston Loke says you should “make sure you understand what you are getting into.”
“Private mortgages can be tailored to a borrower’s specific needs, and so the terms can vary significantly,” Loke said in a video. It can be easier to get a private mortgage; however, private mortgage lenders tend to offer higher interest rates and fees, along with additional costs or restrictions, compared to traditional banks.
If you decide to secure a private mortgage, the FSRA suggests you to consider the following:
- Understand the terms and features of a private mortgage and what they mean to you as it relates to your current and future financial situation.
- Private mortgages could have higher interest rates, higher lender fees or commissions, shorter terms, and interest-only conditions, which means you won’t be paying down any principal over the course of your loan.
- Alternatively, these arrangements may have no payment requirements at all but will add on interest and fees when the mortgage is due.
- Reach out to an FSRA-licensed mortgage broker or agent for guidance. They can help you navigate the process, consider the different kinds of mortgages available, and are legally required to recommend a financing solution that suits your needs. They will also be able to explain why you require a private mortgage and do not qualify for typically lower-cost loans from prime or alternative lenders.
- Don’t hesitate to ask your broker or agent if something isn’t clear, and don’t rush your decision when it comes to choosing a mortgage.
What could happen if you don’t leave a private mortgage?
It is important to remember that private mortgages are supposed to be short-term financing solutions, and the FSRA says they should not be relied on for the long term. During the private loan term, borrowers are meant to get their finances in order so they can access traditional financing options in a year or two.
Private lenders will often give you a mortgage based on the value of your property instead of your income. In many cases, this means you are only paying the interest on a private mortgage and not actually paying off any principal. Thus, it is important you develop a realistic exit strategy to get back to a traditional mortgage and have a backup plan in case you cannot follow through on the exit strategy. Otherwise, you could wind up having to renew your private mortgage and pay a fee or be denied another shot of financing.
It might be tempting to choose the path of a private mortgage to homeownership, but is it the best option? Not long-term. Remember: An educated consumer is a smart consumer.
For more information on private mortgages, visit the FSRA website.
If you need guidance and support with budgeting, debt repayment or any other credit inquiries, Credit Canada offers free, confidential advice on creating a customized debt solution plan. Contact a certified non-profit credit counsellor today.
Frequently Asked Questions
Have Question? We are here to help
What is a Debt Consolidation Program?
A Debt Consolidation Program (DCP) is an arrangement made between your creditors and a non-profit credit counselling agency. Working with a reputable, non-profit credit counselling agency means a certified Credit Counsellor will negotiate with your creditors on your behalf to drop the interest on your unsecured debts, while also rounding up all your unsecured debts into a single, lower monthly payment. In Canada’s provinces, such as Ontario, these debt payment programs lead to faster debt relief!
Can I enter a Debt Consolidation Program with bad credit?
Yes, you can sign up for a DCP even if you have bad credit. Your credit score will not impact your ability to get debt help through a DCP. Bad credit can, however, impact your ability to get a debt consolidation loan.
Do I have to give up my credit cards in a Debt Consolidation Program?
Will Debt Consolidation hurt my credit score?
Most people entering a DCP already have a low credit score. While a DCP could lower your credit score at first, in the long run, if you keep up with the program and make your monthly payments on time as agreed, your credit score will eventually improve.
Can you get out of a Debt Consolidation Program?
Anyone who signs up for a DCP must sign an agreement; however, it's completely voluntary and any time a client wants to leave the Program they can. Once a client has left the Program, they will have to deal with their creditors and collectors directly, and if their Counsellor negotiated interest relief and lower monthly payments, in most cases, these would no longer be an option for the client.