What you need to know about alternate/private mortgages

Consumers who are unable to qualify for a traditional mortgage from banks and credit unions may need to turn to alternative or private mortgages for financing. If this is your case, remember that these mortgages are supposed to be a short-term solution. It can be easier getting an alternative/private mortgage, but you may face higher interest rates and fees along with additional conditions or restrictions.

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Video Descriptive Transcript - Message from Huston Loke, EVP Market Conduct

Be Informed
Ask questions
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Before getting an alternative/private mortgage, be informed of the following:

  • An alternative/private mortgage is typically used as a temporary option for one or two years until you’re able to qualify for a lower-cost option.
  • You need a realistic “exit strategy” to work toward so you’ll have a plan to qualify for more affordable mortgage financing once the mortgage term ends.
  • Private lenders will often give you a mortgage based on the value of your property instead of your income.
  • In many cases you are only paying the interest on an alternative/private mortgage. This means you’re only paying to borrow the money, not reducing the mortgage amount you owe.
  • Private mortgage fees are often higher than with a traditional mortgage. Private lenders can charge fees for late payments, lapsed insurance, or property upkeep if they take over your property due to unfulfilled mortgage terms.
  • Always work with a FSRA-licensed mortgage professional who will help you understand the terms and conditions of an alternative/private mortgage.

Here are some questions to ask your broker or agent when considering an alternative/private mortgage

  • Why are you recommending an alternative/private mortgage and not a traditional one?
  • Why is this the best alternative/private mortgage for me and my family? Is it the most affordable one? If not, what features make it more suitable for my situation even though it’s more expensive?
  • What are the terms of the alternative/private mortgage? Length of the loan, interest rate, repayment schedule, etc.
  • How much time do I have to run this mortgage contract/agreement by my lawyer, partner or advisor? What are my obligations after I sign?
  • What happens if I’m late on my payments or if I can’t make a payment? Could I lose my house?
  • If I still can’t qualify for a traditional mortgage at the end of the term, will the lender offer a renewal?
  • What costs and fees can I expect now, during the course of the loan and at renewal? How are these determined, and how are these paid? Will these fees impact my loan amount?
  • Will I be able to get a traditional mortgage in the future?
  • What happens if I’m late on a mortgage payment or can’t refinance?
  • What if I want to renovate or make improvements to my house, does this impact a private mortgage?

Pay close attention to the details of your contract: Take the time to understand the overall costs of an alternative/private mortgage:

  • Are you being asked to pay fees before you close on your mortgage?
  • Does your contract include additional interest or fees for late or missed payments?
  • Have you been offered the mortgage solely based on the value or condition of your property, and not your ability to make payments?
  • Does the power of sale process start very quickly if you miss a mortgage payment?
  • Does the exit strategy sound achievable? For example, does your broker or agent recommend a plan to double your salary within the next six months? Do you think you can achieve that goal before the end of the term? An exit strategy is not just about this mortgage. It’s a plan for getting your finances to a place where you can qualify for a lower cost mortgage when the alternative/private mortgage term is complete.

Your broker or agent should clearly explain in detail the terms and conditions of your contract, point out all risks, and provide reasons why they feel you can manage the short and long-term costs of an alternative/private mortgage. Don’t hesitate to ask questions and don’t sign a contract until you completely understand what you are responsible for.