What is a private/equity mortgage?
These are mortgages based on your equity and have very relaxed criteria compared to bank mortgages. Typically, the main criteria is an appraisal confirming the market value of the property. However, some due diligence does take place, but nowhere as restricted as to A and B lenders.
You can have these as a 1st mortgage or 2nd mortgage (behind your main mortgage).
Why would I want a private/equity mortgage?
Any reason you wish to access your equity. Here is a list of real-life examples of why people have taken these mortgages:
Debt consolidation
Pay off high interest debts such as credit cards, lines of credits, loans and payday loans.
Home improvements/renovations
Instead of breaking a main mortgage where penalties may be excessive, especially on a fixed mortgage and/or on a low rate, it can make more sense to take a 2nd mortgage to complete renovations for the short-term.
Business start-up/capital for business
Usually an easier way to access large amounts of funds with minimal paperwork. Borrowing for a business loan can be lengthy, more expensive and requires a lot more documentation such as business proposals and financial statements. Proceeding with a private/equity mortgage is a much smoother process.
Purchase pre-construction property based on the increased value
This may be beneficial as it allows the purchaser to have built equity and have more capital/access to more cash from a private lender. After 12 months you can then switch the mortgage back to a conventional lender based on the appraised value. Trying to switch prior to this would mean a lender still using the purchase price.
Construction mortgage/ build a custom home
Much easier to borrow from a private lender. Some lenders will lend on the completed project value.
General criteria is that 2 appraisal values are required; current value and the completion value.
Most lenders will provide funds in stages. Once you complete a stage then funds will be provided to you until you complete the project.
Power of sale
If you are behind on your mortgage with your current lender and they place you in power of sale, then private lenders are able to save you from losing your property for a temporary period. You can resolve the situation by refinancing to a B-lender or selling the property on your own terms.
Rates, fees and costs
1st Mortgages
Interest rate can be anything from 3.99-9.99%
Lender fee around 1-3%
Brokerage fee around 1-2%
2nd mortgages
Interest rate can be anything from 6.99%-15.99%
Lender fee around 2.5-5%
Brokerage fees 2-3%
Lawyer costs
$2,000-4,000. This is because there are two lawyers involved. One for the lender and one for the borrower. The borrower’s lawyer protects the borrower and provides independent legal advice. The lawyer is chosen by the borrower.
Appraisal
This can range around $350-$600. Rush service, more expensive/unique properties and rural properties may have a premium associated with them.