Over the past couple of years, the cost of living in Canada has continued to increase alongside interest rates, putting many aspiring homebuyers in a particularly unfavourable situation. As traditional lenders like the big banks steadily increased their lending criteria, many Canadians found it increasingly more difficult to qualify for the funding they needed — leading to an increase in the popularity of private lenders. Both traditional and private mortgages have their pros and cons, and understanding these nuances can significantly impact your decision-making process when it comes to purchasing a home. In this guide, we will take a closer look at these differences, and explore why some homebuyers opt for private mortgages over traditional bank loans.
While there are a number of policy and protocol differences between private and bank mortgages, the fundamental difference between them is their source of funding.
What is a private lender mortgage? Private mortgages occur when individuals, or private entities, loan money directly to borrowers. These lenders can be private investment firms, for instance, but can also take the form of family members or friends that may be willing to offer a loan. Private mortgages are most common amongst borrowers that are unable to secure financing through traditional banks, be it due to poor credit history, unconventional income sources, or other unique factors.
Bank mortgages, on the other hand, are loans provided by financial institutions such as banks, credit unions, or mortgage companies. These loans often follow a much more rigorous application process, that is standardized amongst all borrowers. Banks are furthermore subject to a greater number of regulatory guidelines that are set out by government agencies — leading to a lack of flexibility on approval criteria. If you have a good credit score and a stable income, bank mortgages will typically offer you competitive interest rates and more favourable terms than their private counterparts.
Despite the potential drawbacks, many homebuyers opt for private mortgages due to certain advantages that may better align with their unique circumstances and preferences.
Ultimately, the decision between a private mortgage and a bank mortgage depends on your financial situation, personal risk tolerance, and preferences. While private mortgages offer flexibility and accessibility, they come with inherent risks and may not be suitable for everyone. Conversely, bank mortgages provide stability and regulatory protections but may be less accessible to certain borrowers. Still unsure? You may want to enlist the help of a Clover Mortgage broker. By weighing the pros and cons of each option and considering your individual needs, our expert team can help you make informed choices that align with your homeownership goals. Contact us to schedule your free consultation today!
Unfortunately, when it comes to comparing private and bank mortgages, there is no one-size-fits-all answer. Finding the ideal mortgage type for you, in terms of lender vs bank, will depend heavily on your personal and financial circumstances.
When looking at the pros and cons of private mortgage lenders, there are a few notable downsides that are important to consider. When choosing private mortgage lenders vs banks (in Canada), here are some potential cons to consider:
Private mortgages often come with higher interest rates compared to traditional bank mortgages, which can make them more expensive over the life of the loan.