What is a private mortgage?
Essentially, this type of mortgage is one that is provided by another person or even a business rather than the traditional route of choosing a bank. At times, it might be the only option left after getting rejected from a bank already. However, some people prefer this over borrowing from a finance provider.
Ultimately, a private mortgage doesn’t have the same restrictions as a traditional mortgage from a bank. With this in mind, it often offers more freedom and flexibility depending on whether the finances are coming from an individual or perhaps a business. Despite these differences, there is one key premise that makes the deal worthwhile; it must have a ‘win-win’ element for all parties. On the one side, you have a borrower that is getting the money to buy a house or whatever it might be used for. On the other hand, you have an individual or business taking a risk with their money. As long as there is a return in place for them, it becomes worthwhile and the risk remains low for both.
Why choose a private mortgage?
Before we head into some precautions for private lending, we should first assess why this is necessary in the first place. Surely the mortgage industry has been set up so that private lending can be avoided and everyone has a chance to borrow money and begin their new life? Well, there are a couple of examples where private mortgages may be necessary as you will see below.
Help Friends / Family
This works both ways and the obvious ‘help’ comes from the lender who is choosing to provide their own money for their friend or family member. However, the borrower is also helping the lender and this comes back to the ‘win-win’ situation we discussed a little earlier. How? Rather than paying expensive interest to the banks, the interest will now be paid to someone you know. With this, you know that the money is doing good on both sides which is great news.
Aside from this, it could be the rules put in place by traditional lenders that means private mortgages are the only option left. During the application process, there is a significant amount of paperwork and a substantial amount of information that needs to be provided before traditional lenders will consider you for a mortgage. If you are self-employed, or still young, it can be difficult to get the right paperwork in place. When this happens, the only options available is to give up, or choose a private lender.
Make the Agreement Official
One of the worst things that people do with a private mortgage is fail to make it official or get the agreement in writing. In truth, both the borrower and the lender should want to have it in writing because it provides a layer of protection that otherwise wouldn't exist. When formalizing the process, you should use a promissory note as well as registering the mortgage loan with the local authorities and the IRS. After the property has been purchased, the deed can also go to the necessary bodies.
Furthermore, you should be looking to have a mortgage deed for the security of the loan. If the borrower was to pass away, there wouldn’t necessarily be a link in place to the lender. Therefore, this security ensures that the lender takes ownership of the property if the borrower dies. Once this agreement is in place, it keeps everyone happy and it ensures that everyone knows the rules in place when it comes to repayments, interest rates, and more.
On the topic of interest rates, this should be something you decide in advance and stick to once the agreement is in place. Immediately, you might think ‘hang on a moment, I am borrowing money from family so there doesn’t need to be any interest added!’ However, there are two key reasons why interest is essential:
- Firstly, the lender is protected against inflation. If there was no interest involved, the amount of money would be worth less when it is returned than it is now and the lender loses out.
- Secondly, interest is also beneficial for the borrower because they can enjoy the tax benefits. If there is no interest in place, the borrower will not qualify for home mortgage interest deduction.
As you can see, having no interest in place actually causes both parties to lose out so this is something that needs to be agreed upon. Once a figure is discovered that beats inflation and allows for qualification for the tax benefits, this can go into the official agreement.
Before the agreement is confirmed, there should be a discussion as to what happens in various circumstances. For example, what happens when a payment is missed? Can the loan be restructured in any way, if required? If necessary, this is the best time to contact an attorney because they will assess your agreement and give you tips on how to improve or make changes. If the attorney gives your contract the go-ahead, you can be fairly confident that the agreement is a strong one.
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Investing in a mortgage for the first time is the best way to begin to build your own personal equity. Benson specializes in residential private mortgages in Ontario. If you're ready to buy property and you've had a hard time getting approval from the banks, talk to us! We have a wide variety of financing options available and are happy to sit down with you, assess your financial situation and offer you a variety of customized solutions to choose from in order to meet your goals. Our simple and straightforward process makes it easy for you to finance your new home. Just tell us which property you're interested in and we'll help with all of the financing paperwork, and secure your mortgage.