As of January 2018, the Bank of Canada introduced a new regulation that requires all financial institutions to facilitate a mortgage stress test. This so-called “test” basically analyzes a borrower’s financial portfolio to see if they can continue making payments if interest rates dramatically increase.
This stress test has essentially made it harder for first-time buyers to obtain a mortgage, which is why many individuals are now turning towards private mortgages. These types of mortgages are typically obtained via private lenders and offer different interest rates. According to an article in Global News, private mortgages increased by 67 percent in 2018 in the Greater Toronto Area, reflecting an increasing popularity.
Private mortgages are typically tailored for individuals with a bad credit rating. If a client has a history of bankruptcy or unpaid debts, a major financial institution will not approve a loan. Therefore, these individuals must look elsewhere, which explains the increase in demand for private mortgages. On the other end of the spectrum, those without a sufficient credit history are also ample candidates. For example, many young adults who’ve never had a credit card may be ineligible for a mortgage at a large financial institution. The banks will refuse a loan simply because they don’t have enough information about the borrower’s ability to repay the money, driving more individuals to turn to private mortgages.
Many foreign property investors are also taking advantage of private mortgages because it’s quicker compared to going to a Canadian financial institution. Over the last decade, a large volume of international clients, particularly from East Asia, have successfully purchased properties through this method.
For those with a poor credit history, a private mortgage can typically be approved on equity. In this case, most lenders will have to offer a possession as collateral (i.e. another property, a car, jewellery, etc). If the lender cannot make the monthly payments, the borrower can move forward with the process repossession. We always recommend our clients read the fine print to fully understand the terms of agreement. After all, private mortgages differ from mortgages offered by mainstream financial institutions.
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If the answer’s yes, then reach out to LocalBrokers.ca today. Our experts will be able to help you find the perfect solution so you can purchase the property of your dreams.