Today, I am going to discuss private mortgages, the difference between the types of private mortgage lenders, as well as explain some common uses and risks of a private mortgage.

First, it is important to note that a private mortgage is not for everyone, and your Mortgage Broker should exhaust all other options before recommending a private mortgage. Further, a private mortgage should only be used as a short-term solution with a clear exit plan.

When it comes to private mortgage lenders, there are mainly two different types, and one is more similar to an alternative lender than a private. This type of lender is called a Mortgage Investment Corporation, or MIC for short and then we have the regular individual private mortgage lender. There are some important differences between the two, and these differences need to be considered when deciding to proceed with either of the lenders. 

A Mortgage Investment Corporation is a collection of private investors that pool their funds together by buying shares in the corporation, much like a regular investment. The funds are then handled by the funds manager and used to fund many different mortgages through Mortgage Brokers looking for a solution for their clients when other options are lacking. A Mortgage Investment Corporation is provincially registered and requires a license to operate.

An individual private mortgage lender is a single investor that funds a mortgage using their own investment capital. This type of private lender does not need to be registered or licensed; however, they do need to operate with a licensed Mortgage Brokerage in order to lend their funds.

A private mortgage solution can be required for many different reasons, such as an unconventional property type that a conventional lender won't entertain, a new construction property, a poor credit score and history that doesn't fit conventional lender guidelines, the need for a quick closing, or even a debt consolidation solution.

As mentioned previously, no matter the reason for requiring a private mortgage, nor the type of private mortgage lender, in most cases, a private mortgage should only be a short-term solution and there should be a clear and reasonable exit strategy from the private mortgage. Even though a private mortgage may be renewable at the end of a term, renewing a private is not normally a viable strategy and may prove to be costly.

In most cases, a private mortgage will have a monthly payment, just like a conventional mortgage; however, will likely be comprised of interest only. This means that at the end of the term of the private mortgage, the amount owing will be the same or greater than the amount that was advanced on closing day. Some private mortgages do offer blended payment options; but, the payment will usually be comprised of mostly interest, with little being paid towards the principal.

Private mortgages are commonly offered in shorter terms when compared with a conventional mortgage. This fits perfectly with the fact that private mortgages are a short-term option. A common term for a private mortgage is one year and may be open, meaning it can be paid out at any time, or closed, meaning there will be a prepayment penalty if it is paid out early.

When it comes to the interest rates of a private mortgage, they are higher than a traditional lender and are set by the lender based on their source of funding and risk appetite, as well as their rate of return to their investors. It is not un-common to see private mortgage rates above ten percent; however, there are many private mortgage lenders that have competitive interest rates not very far off of a conventional alternative lender.

There are also fees involved with a private mortgage, and it is very important to pay attention not only to the fees to enter the private mortgage but also the fees and costs to get out later on. Your Mortgage Broker should review the lending documents fully and be able to communicate all fees clearly, as well as costs that should be expected, and also outline any fees that may come up later on. A great interest rate on a private mortgage may not be all that great when the fees and costs are added on and the Annual Percentage Rate is calculated.

Common fees associated with a private mortgage are lender fees, broker fees, appraisal fees, set-up fees, administration fees and increased legal fees. Potential future fees, such as renewal fees or prepayment penalties, should be clearly understood ahead of time so there are no surprises later on.

Before proceeding with a private mortgage, you should ask your Mortgage Broker if they have dealt with this lender previously, or if they are aware of their business practices and how they handle their mortgages, not only at the start; but, throughout the term to the end as well. This includes how they handle renewals in case one is required in the future. Online reviews are important as well; however, keep in mind that many of the negative reviews maybe from past clients who simply were not made aware of the pros and cons of the mortgage they were being put into. This is where full disclosure and transparency comes in and should be of the utmost of importance for all types of mortgages, especially private mortgages.

A common term and form of advertising to hear in the mortgage industry is that "in most cases, my services are free". While it may come across that Mortgage Brokers are doing the work for nothing, in reality, it really comes down to who pays us, and more often, it is the lender, not the borrower. 

For a typical, well qualified mortgage file that is done on the Prime, or A lending side, a Mortgage Broker is paid by the lender as a form of commission, or finder's fee. I will discuss broker fees shortly; however, it is important to note that most Prime lenders do not allow Mortgage Brokers to charge any fees, such as a broker fee, to the client. If you are having a mortgage done by a Broker where a broker fee is being charged, and it is with a Prime lender, it is recommended to discuss this with the broker and lender to ensure everything is being done properly. 

A finder's fee is paid to the Mortgage Broker by the lender after the mortgage has funded, also known as the closing day, and is generally a percentage of the mortgage amount. A typical percentage is one percentage of the funded amount; however, it varies amongst lenders and is higher or lower depending on the length of the term.

On top of the finder's fee, a Mortgage Broker may also receive other incentives, such as Volume Bonuses from lenders that a Mortgage Broker uses commonly or Efficiency Bonuses from lenders to award Mortgage Brokers that send quality files or promotions that are offered by lenders from time to time.

Another form of commission that a Mortgage Broker may make from a lender are trailer fees. A trailer fee is a form of commission that is paid over time rather than all up front. A finder's fee is still paid shortly after closing the mortgage; however, it is smaller than normal since a portion of it is paid out annually. This method of getting paid is preferred by some brokers as it stretches out their income stream and may allow better control of funds.

When a Mortgage Broker works on a file that is suitable for an alternative, also known as a B lender, or a private lender, they may charge a broker fee, which is a fee for their services that is paid for by the client and is normally processed on closing day and collected by the client's lawyer and then sent to the Mortgage Broker.

The reason that a broker fee may be charged on these types of files is that some of these lenders do not pay a finder's fee to the Mortgage Broker directly; or they offer a lower finder's fee than normal.

It is important to note that a broker fee may not be charged on alternative files since the lender may offer a suitable finder's fee to compensate the Mortgage Broker. If a broker fee is being charged, it could be that the lender does not pay a finder's fee or there was a substantial amount of work put into the file, or a combination of both. Most private mortgages will feature a broker fee as the majority of private lenders do not pay the Mortgage Broker any compensation.

Whether a mortgage is being done with a prime, alternative, or private lender, a Mortgage Broker should always be transparent about their method of compensation and be open to explaining who is paying them for their services, the lender, the client, or both? A Mortgage Broker is also required to disclose how they get paid directly to the client on the Disclosure To Borrower document that is given to the client during the mortgage process. If your Mortgage Broker is not transparent or has not disclosed this information to you, it is recommended to ask why and get more information to ensure you are protected.

There is nothing wrong with asking your Mortgage Broker if there is a different product available to you that would pay the Mortgage Broker less money in order to save you more money over the course of your mortgage. In fact, Mortgage Brokers are regulated to ensure that the mortgage product offered to the client is in the best interest of the client, and recommendations were made without weighing the broker's compensation above the client's interests.

It is also important to note that a Mortgage Broker is not paid directly by the client, and all compensation must go through the mortgage brokerage that the Broker represents, no matter what type of compensation it is. If your Mortgage Broker or Agent is requesting payment directly, you should discuss this with the Principal Broker of the brokerage or the regulator, the Financial Services Regulatory Authority of Ontario.