Private mortgage프라이빗 모기지 (사설 모기지)

What is it?

A private mortgage is a loan secured on your home that comes from a private person, a group of investors or a private lending company, not from a regular lender such as a bank or credit union. Ontario’s financial regulator (FSRA) says you can get a mortgage loan “from any business organization, person, or group”.

FSRA explains that people who cannot qualify for a traditional mortgage at a bank or credit union may turn to alternative or private mortgages. It stresses that these mortgages are supposed to be a short-term solution. They can be easier to get, but rates and fees are higher and there may be extra conditions or limits.

Private mortgages are usually arranged through a mortgage brokerage. You must work with a Level 2 mortgage agent or a mortgage broker. A Level 1 agent can only help with mortgages from traditional lenders such as banks and credit unions.

When do people use one?

These are common reasons people look at a private mortgage. Everyone’s situation is different, so ask the broker to explain why you need one.

• Credit history or proof of income keeps you from passing a bank’s review. FSRA says private lenders often lend based on the value of your property instead of your income.
• You need money for a short, fixed time. For example, the gap between closing on a new home and selling your old one, or a building or repair period.
• Your bank will not renew your mortgage when the term ends.

FSRA says that if you use a private mortgage, you need a realistic “exit strategy”, a plan to move to a lower-cost mortgage when the term ends.

How is it different from a bank mortgage?

Rates and fees vary a lot by lender, property and borrower, so this page does not give a “typical” percentage. Check the real numbers in the written disclosure your broker gives you.

Costs and risks

• Interest only: FSRA says that in many cases you only pay interest on a private mortgage. You are paying to borrow the money but not reducing what you owe. When the term ends you must pay back the whole amount at once or borrow again.
• Higher fees: FSRA says to check whether you are asked to pay fees before closing and whether late or missed payments add interest or fees. Lenders can also charge for lapsed insurance, or for upkeep if they take over the property.
• Renewal is not guaranteed: FSRA suggests asking whether the lender will renew if you still cannot qualify for a traditional mortgage when the term ends.
• Risk of losing the home: FSRA says to check whether the power of sale process (the lender selling the home) starts very quickly after one missed payment. For the minimum notice periods in the law, see “Power of sale”.

Protections in the law

A brokerage that arranges mortgages in Ontario must follow the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) and its regulations. These rules matter most for private mortgages.

• Written risks: the brokerage must tell you in writing about the material risks of each mortgage it presents, and get your signed acknowledgement (O. Reg. 188/08, section 25).
• Relationships and conflicts: it must tell you in writing how it is related to each lender (including whether the brokerage itself is the lender) and about any conflict of interest (sections 26 and 27).
• Plain language and two business days: disclosures must be clear and in plain language (section 33), and you must get them at least two business days before you sign the mortgage agreement (section 35). You can agree in writing to get them later, so do not agree in a hurry.
• Cost of borrowing statement: the brokerage must give you a written statement with the principal, the total of all payments, the cost of borrowing over the term in dollars, the annual interest rate, the APR (the yearly cost including fees) if it is different, each payment, and the costs of prepaying or missing payments (O. Reg. 191/08, sections 6 and 8).
• Up-front fees: if the mortgage is $400,000 or less, the brokerage cannot ask for or accept an advance payment or deposit for services or expenses (O. Reg. 188/08, section 37). FSRA says an up-front fee on a loan above $400,000 should not be paid in cash and must be paid to the brokerage, not to the agent or broker.

The FSRA pages and rules I checked do not give a cooling-off period to cancel a mortgage after you sign. FSRA says a mortgage is a legally binding contract, so review it well before you sign.

Questions to ask before you sign

These are the questions FSRA suggests asking when you are thinking about a private mortgage.

1. Why are you recommending a private mortgage and not a traditional one? Is this the most affordable choice for me? If not, why is it a better fit?
2. What are the term, the interest rate and the repayment schedule?
3. How much time do I have to show the contract to my lawyer, partner or advisor? What do I owe after I sign?
4. What happens if I pay late or cannot pay? Could I lose my house?
5. What costs and fees are there now, during the loan and at renewal? How are they set and paid? Will they change my loan amount?
6. If I still cannot qualify for a traditional mortgage at the end of the term, will the lender renew? Is the exit strategy realistic?
7. Will renovating or improving my home affect the private mortgage?

Example

Fraud and red flags

• Someone suggests stating your income, job or down payment source falsely. FSRA warns that knowingly misstating facts on an application is mortgage fraud, a criminal offence that can be prosecuted.
• Someone asks you to get a mortgage in your name for another person (a “straw borrower”). FSRA says this is illegal, you will be responsible for the mortgage, and the lender may sue you.
• You are asked to sign a form with blanks. Never sign a document that is wrong or incomplete.
• A mortgage offered only on the value or condition of the home, not on your ability to pay, or an unrealistic exit plan like “double your salary in six months”. FSRA gives both as warning signs.
• If fraud is found before closing, the loan can be cancelled and you could lose your deposit or be sued. If it is found after closing, the lender can demand the full amount right away (FSRA).

Check the licence of the agent, broker and brokerage on FSRA’s public register. See “FSRA” for how.

If you are the one lending (investing)

Some people lend their own money through a private mortgage as an investment. The brokerage must give lenders and investors an approved disclosure form, any appraisal from the last 12 months it has, proof the borrower can make the payments and more, and get their signed acknowledgement (O. Reg. 188/08, section 31).

FSRA warns that syndicated mortgages, where two or more people invest in one mortgage on one property, can be extremely risky for investors. Talk to a lawyer before you invest.