Despite the more stringent mortgage lending rules recently put in place by Canada’s government, little effect has been had on the thirst for Vancouver homes. In fact, this past March home sales totalled 5, 173, which is up 27.4% from the same month in 2015. Of the various consequences these changes have had however, is the spike in private lenders that has grown as a result.
Although traditionally private lending has often been painted as too risky or too expensive, there are circumstances in which it can present an excellent alternative. Defined as an individual or organization that provides cash flow for real estate investments, a mortgage broker acts as a middleman between the private lender and the homebuyer during the transaction, often along with lawyers completing the transaction. With the ability to choose the lending area, the term, the type of property, as well as the borrowers, a growing number of people disappointed with current rates of return on more traditional investments view private lending as a liberating substitute; of course, a further incentive is that the loan is backed by a concrete asset.
With more non-traditional qualifying guidelines in private lending however, comes higher risks for both parties and this is certainly reflected in higher interest rates. But for many people who have been turned down by A lenders, in particular those who are self-employed, new to the country, or who have or plan to buy pre-sale, B lending or private lending could be a short term viable option.
Although borrowers who go after private lending have traditionally been seen as “high-risk,” this is not necessarily the case. A wealthy client of mine from abroad recently made a trip to Vancouver to scout for a home. He is the owner of a number of residential investment properties in his own country, which supplies him with a healthy annual ROI large enough to comfortably live off. He is planning to sell these other properties within the next year, forming a type of ‘exit strategy’ if you will. Despite having a large down payment, with the sliding scales in place with most lenders, he will still come out short with a traditional lender. He is restrained by the amount of liquid assets he currently has in Canada, as well as by Canada’s rules and regulations on how much money he can transfer from overseas. Although more expensive than a traditional loan, private lending allows him to purchase the home and provide him with a short term solution until he can sell his investment property and transfer the money over.
As many private lenders look at the overall risk of the property, they often don’t require the same amount of hard proof traditional lenders do but instead focus more on the homebuyer’s exit strategy and circumstances. Interested homebuyers who know they’re coming into an inheritance, are planning on selling a major asset, or have a number of investment properties already are likely good candidates for private lending. Those who have an investment property which is not currently bringing in the market value of rent, and who need time to renegotiate a lease or complete renovations that will increase the property value, can take out a second mortgage with a private lender for the short term. After that period, they can return to a more conventional financing model.
Private lending cuts through a lot of red tape and loans are granted faster, often within a couple of days. They are not usually affected by the borrower’s credit rating, because the loan is secured by a tangible asset. It’s the property that is studied, not the borrower and the higher rates and fees account for the risk that the lender is willing to take.
If you are stuck in a situation and think that private lending may be a good short terms option for you, find a reputable mortgage broker who deals with private funds. They can find someone who is the right fit, and will talk to you about additional fees and interest rates so that you have the whole picture before you make a decision on whether private lending benefits your current situation.