As private lenders' commercial interest rates and fees range from 6.00% to 20.0%, why would any borrower ever use them? Let me begin by explaining that private mortgages, because of their costs to borrow are only to be used on a short-term basis, normally from 3 months to 2 years to fulfil a profitable short term requirement and only when the return on the project or property involved makes it sensible to use a private mortgage.
Another prominent reason is that the institutional lenders deem the mortgage risk to be greater than they are willing to accept and will not fund the mortgage. However, private lendres are usually much more flexiable and will consider loan applications that institutional lenders would definitely not even consider.
That being said, there are any number of other valid reasons to use private money, as you will see by the following examples.
Speed of mortgage approval: as many private lenders are small organizations with a flat chain of command and approval structure, if time is of the essence, many times private lenders are the only option. Many borroweres use private mortgages as a stop gap until they can negotiate mortgages with larger institutions.
Interest only payments: Many private mortgages require interest only payments, thereby minimizing the mortgage cash outflow, normally when cash flow is paramount, such as during renovations for example.
Open mortgage: many private mortgages are open, in that they can be paid off at any time. normally without any or a small prepayment penalty, which adds to their flexibility.
Variable rate mortgage: Again, although variable rate mortgages are also available with institutional mortgages, a much larger percentage of private mortgages are of the variable rate variety.
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R. Mike Mullin, CPA, CGA - Licensed Commercial Mortgage Broker, throughout B.C. Commercial Mortgages, Investment Mortgages, ICI Mortgages, Re-financing Mortgages, CMHC apartment building mortgage insurance Multi-Family Mortgages, CMHC Multi-Family Mortgage Correspondent for Purchases, Re-financing & Construction Mortgages Based on Vancouver Island, serving All of BC.
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