DV Capital Corporation
How to Replace a Private Mortgage?
Private Mortgage Broker & Lender Services.
What is a Private Mortgage?
Residential & Commercial Private Mortgages.
A private mortgage is funded by a lending source other than a traditional lender such as a bank, credit union or trust company. There are generally three different sources of private mortgage lenders that operate in the Canadian mortgage market. These private mortgage lender sources include: Mortgage Investment Entities (i.e., a Mortgage Investment Corporation), Mortgage Syndicators that are typically managed by licensed Mortgage Brokerages, and Individual Private Mortgage Investors whose lending activity is facilitated through licensed Mortgage Brokerages. In either case, it is important for mortgage borrowers to consult a licensed mortgage professional to receive guidance on product information and to benefit from their private mortgage experience.
What is a Private Mortgage Broker?
Private Mortgage Lending.
Generally speaking, a private mortgage broker a term that well loosely used for the context of this article, that speaks to a licensed mortgage professional who assists mortgage borrowers with private mortgages. It is important to note that at the time of this article, the Ontario mortgage regulator, the Financial Services Regulatory Authority of Ontario (FSRA) has implemented a new mortgage licensing tier system that specifically increases regulations on private mortgage brokering activity and has resulted in an outcome that only 2 of 3 licensing tiers are allowed to deal or trade in private mortgages. Given the niche nature of private mortgages, and unlike federally and provincially regulated lenders who must abide by government prescribed underwriting guidelines, private mortgage lenders are able to, within reason, implement their own underwriting policies, many of which are much less stringent compared to traditional lenders. Amidst a turbulent real estate market, the regulator has determined that additional oversight of private mortgage activity is in the best interests of consumers. A private mortgage broker is a professional that understands the landscape of private mortgaging, has access to multiple private mortgage lenders, understands the characteristics of multiple private mortgage products and has the ability to understand which products might be most suitable for their clients to consider.
Private Mortgage Characteristics:
- Term Length: Private mortgages, by design, are short-term financing products typically used as a bridge facility between a short-term purpose or as a stepping stone to traditional financing.
- Cost: Private mortgages, given the elevated perceived risk in the eyes of private mortgage lenders, as a result of either the property type, the property location, the purpose of the loan and/or the income and credit profile of the client, has a pricing premium compared to traditional financial. At the time this article is being written, the minimum interest rate premium at the time this article is written is usually 2% + the going rate of traditional and alternative mortgage rates and it is important to understand that there are fees associated with private mortgage financing that usually begin at 2% – 3% of the loan amount that the client is responsible for paying at the time of funding, or, will be capitalized or deducted from the mortgage loan advance – in either case, it is an expense cost borne by the client.
Flexibility: Unlike most traditional and alternative bank lenders that have government prescribed underwriting guidelines that unfortunately push many hard-working homeowners outside of the ‘bank box’, private mortgage lenders are able to implement their own underwriting guidelines. In many cases, private mortgage lenders primary focus is the marketability of the real estate security such as the property type, location, condition and overall marketability. Of course private mortgage lenders want to understand the income and credit profiles of the clients they will be lending to, they are generally much more flexible than traditional and alternative mortgage lenders and have greater tolerance and leniency with less than perfect credit, property is less than ideal condition, and have niche lending products catered to an array of client-profiles. Flexibility at a premium may provide immense value in the eyes of certain client types hence why borrowers may have elected or opted to take a private mortgage.
Private Mortgage Exit Strategies:
Ultimately, given the short-term nature of costlier financing, borrowers are naturally motivated and incentivized to transition out of a private mortgage into a traditional or alternative mortgage.
Primary Ideal Option: Replace a private mortgage with a traditional or alternative mortgage – this typically involves an acceptable property type (traditional and alternative lenders typically focus on financing cookie-cutter property types such as detached, semi-detached dwellings as well as commercial and industrial units and buildings and shy away from purpose-built assets such as gas stations, hotels and places or worship, at least not to the same extent) in an acceptable (marketable) locations – in addition, the borrower and/or loan sponsors must have acceptable income, credit and net-worth, and in the case of income generating real estate, the property must cash-flow and debt service to acceptable standards – should all of the aforementioned ‘check-out’ said borrowers may be a candidate to discharge and replace their private mortgage with a traditional or alternative mortgage lender.
Secondary Ideal Option: in the event the borrower is struggling to obtain an approval from a traditional or alternative lender, the borrower may require an extension or renewal from their current private mortgage lender. It is important to understand that private mortgage lenders are not obligated not required to offer or provide a renewal of extension. Should a private mortgage lender offer a renewal or extension, they may only do so for a few months and may maintain or increase the interest rate and usually charge a renewal fee which may resemble their initial lender fee at the inception of the mortgage – this is usually required to be paid in certified funds however some lenders may allow the renewal fee to be capitalized to the loan. Furthermore, said lenders may impose requirements and conditions that must be satisfied. In the event that said private mortgage lenders do not wish to offer a renewal or extension, which is entirely within their right, you may find yourself in a position where you need to pay-off or replace said private mortgage with another private mortgage, that is, if you cannot qualify to replace your existing private mortgage with a traditional or alternative lender, or have the funds to pay-off your existing private mortgage. Keep in mind that a new private mortgage usually requires an appraisal and caries with it costs such as an interest rate, lender, broker and legal fees.
Why Won't a private lender renew a mortgage?
As mentioned, private mortgages are short-term products usually intended as a stepping-stone for 12 months; private mortgage lenders may offer their borrowers an extension or renewal if they feel that their investment is secure and desire to do so – the private lender will determine the term length of the extension or renewal, the conditions, required documents required and associated costs. A borrower may benefit from an extension or renewal if their anticipated game plan for maturity has not come to fruition. There are, however, various situations where private mortgage lenders will not offer their borrowers a renewal.
Strictly a Short-Term Lender: Aside from the fact that private mortgages are generally 12-month terms and depending on the circumstances, the private lender may offer their borrowers a renewal or extension, some private lenders will not entertain or renew a renewal or extension under any circumstances. As a result, the borrower will need to find a mortgage to pay out or replace the lender’s mortgage on or before the maturity date. Therefore, it is worthwhile to have an understanding of a potential private mortgage lender’s renewal policy. For instance, do they offer renewals and if so, under what circumstances? If they are not in the business of providing renewals, this is information that you may wish to have before committing to a lender that does not offer a renewal. It is not so much that you intend to require private funds for longer than 12 months. The reality is that one may require private financing longer than expected. For this reason, it is good to inquire about this upfront as it may make more sense to work with a private lender who would be open-minded to offering an extension or renewal.
Concerns with the Real Estate Security: The private mortgage lender may no longer feel secure in their mortgage investment during or as the maturity date approaches. In other words, a private mortgage lender may want their money back at the end of the term. This may have absolutely nothing to do with the borrower. The borrower may have made all payments on time and as agreed. Depending on the economy, cost of capital, and the real estate market including concerns with the value of the subject property, the private mortgage lender may no longer feel comfortable having their money extended and secured against the subject property.
Concerns with the Borrowers: It is not unheard of for a private mortgage lender to have no interest in offering or extending an extension or renewal to a borrower if there were missed or late payments during the mortgage term. Even if there was a reasonable explanation surrounding the circumstances or events, a private mortgage lender may elect to demand the repayment of their money at maturity, leaving the borrowers to replace the mortgage on or before the maturity date.
DV Capital Corporation works closely with residential and commercial real estate owners and has experienced and worked through countless cases of clients who must find a replacement mortgage. If you are facing a situation whereby your existing private mortgage lender is not offering you an extension or renewal, contact us to discuss a potential game plan; we’d be pleased to explain how to replace a private mortgage.
In summary.
We are your private mortgage experts.
DV Capital Corporation is a licensed mortgage firm, active with private mortgage brokering and lending across Ontario, British Columbia and Nova Scotia and possesses over a decade of intensive experience in all facets of the private mortgage cycle. Whatever your situation is, DV Capital warmly invites you to contact them for a complimentary and confidential discussion. Having underwritten and funded millions of dollars in private mortgages they possess critical knowledge and expertise to assist you in understanding your options – we look forward to speaking with you!
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