Think about McDonald’s: a universal symbol of predictable, fast service delivering the same trusted meal coast to coast. This, says Derek Serra, president of Westboro Mortgage Investment Corp, epitomizes how most prime mortgage lenders operate.
The world of private mortgage lending, however, is more akin to an independent burger joint. There may not be a Coke in every order, or they may not even have Coke. Yet, they can still serve up a delicious meal, he told an audience at the 2023 National Mortgage Conference in Toronto.
“I’ve seen tons of commitments from tons of private lenders across the country, and they are all very different,” Serra explains.
Private mortgages are still a relatively small portion of Canada’s overall loan volume—roughly 10% of all mortgages as of Q4 2022, according to CMHC data. But their share has grown by 45% in the past 10 quarters.
These mortgages entail higher interest rates, but can be an attractive option for homebuyers unable to secure financing through A lenders.
Many of these homebuyers are in stressful positions. Some are in a financial crunch and need a short-term mortgage to get them out of a challenging situation as fast as possible. Newcomers or self-employed professionals, for whom it can be more onerous to prove their income, may also opt for a private mortgage.
Private mortgage clients require guidance
However, Serra said, private mortgages can be tricky to navigate, and clients aren’t necessarily aware of what they need. “The client didn’t wake up today and say: ‘I want to be a private client,” he said. “They’re waiting for [brokers] to give them the guidance on what lender should be selected.”
Above all, Serra said, the application requirements for private mortgages can look very different from A lenders. Some private mortgage investors may not even require homeowners to submit documentation. That said, just like a hole-in-the-wall burger joint, the experience of a private mortgage client can differ drastically from someone applying for a mortgage through one of the big banks.
Private mortgages may charge additional fees that a conventional mortgage does not. For example, some private lenders attach penalties to their open mortgages for customers who don’t give two to three months’ warning before exiting. Others don’t lower rates when the Bank of Canada’s prime rates drop. Even as someone with over 25 years’ experience in prime and private mortgages, Serra said he still comes across unfamiliar terms and conditions.
Because a private mortgage can be offered by either individual investors, syndicates of individual investors or mortgage investment companies—each with their own risk appetites—reading the fine print is more important than ever. “You cannot go in expecting a vanilla solution that doesn’t exist,” Serra said.
Aside from reading the fine print, Serra said brokers must prepare plenty of their own paperwork. He noted that lenders may provide better terms and rates for brokers who submit detailed mortgage applications.
In particular, he said lenders pay special attention to assessments of a home’s condition, especially as it compares to equivalents in the area. Anything scoring a ‘fair’ or lower might give a lender pause. Unusual features about a home, such as solar panels on a roof or a lack of drywall in a bathroom, might give a lender cold feet if a broker doesn’t point it out beforehand.
The exit strategy is key
Perhaps the most different aspect of closing a private mortgage for brokers used to conventional lending is the exit strategy.
In a HELOC, Serra said, a broker might close a deal and never hear from their client for 25 years, if ever. But private mortgages work on timelines ranging from months to just a few years. Discussing a solution—ideally, an exit from the private mortgage and a move back to the prime lending market—is key.
“Starting with the exit in mind is a very powerful part of the dialogue, which is obviously very different when you’re putting a client into a HELOC,” Serra told the audience.
Ultimately, private mortgages can be a useful tool to help homeowners unable to secure financing elsewhere, but Serra says mortgage brokers need to educate themselves on all of their different features. When deals go sideways, Serra said it’s typically due to a lack of familiarity with private mortgages.
Getting a private mortgage right for a client is also good business for brokers even after a deal closes. Many applicants consider a private mortgage because they have nowhere else to turn, and are typically stressed or distraught.
“If you help them at this time,” Serra said, “you have a client’s loyalty for life.”
It’s important to note that brokers in Ontario wanting to arrange both private mortgages and investments for private investors and mortgage lenders must now obtain a level 2 licence from a FSRA-approved provider.