One broker is cautioning colleagues on private lenders, which are gaining popularity among borrowers shut out from banks by the new mortgage rules.
“In the last two months we have seen a sudden increase of clients interested in private and syndicate lenders,” said James Loewen, broker at Loewen Group in Burlington, Ont. “Sometimes there’s a sense of urgency or rush, but brokers need to be careful in picking a reputable private lender in order to protect their clients.”
He’s urging brokers to practice the necessary due diligence and look closely into the background of potential lenders before referring their clients.
Many are already applying that kind of scrutiny, especially as property values in some markets edge downward and seasoned investors become more selective.
“A colleague reported doing eight to nine private lending deals in the last week and said they we’re likely doubling down on such transactions in the next few weeks,” said Loewen. “But he’s also being careful because private lenders do not go under the same scrutiny and guidelines as banks.”
Clients also need to be reminded that such investors are lending their money to borrowers who have typically been rejected by banks and may overlook issues such as poor credit, bankruptcy and zoning issues. Still, the focus on property value comes at a price in terms of more restrictive terms and higher borrowing costs.
Every investor is different in the amount of money they are able to provide, the rates they charge as well as the options and combinations of benefits and terms they offer a borrower, said Loewen.
Interest rates that borrowers pay on private mortgages are also typically higher than what a bank would charge. The length of such mortgages, are typically one to three years.
“Just as they do in dealing with banks,” Loewen said. “The task of the broker is to find the private lender that offers the best terms for the client and make sure their interest is protected.”