One of the most important decisions borrowers face when securing a mortgage is whether to get their mortgage loan with a private lender or a traditional bank. Both options have advantages, depending on individual circumstances, financial profiles, and the urgency of the loan.
In this blog, we’ll explore the differences between private lenders and traditional banks, their pros and cons, and help you determine which might be the best fit for your mortgage needs.
What is a Private Lender?
Traditional banks and Monolines are known as A-lenders, but they aren’t the only entities in Canada that offer mortgage loans. Private lenders are small companies or individuals who provide mortgages outside the typical A-lenders. Their mortgages are often a little different and usually short-term.
Private lenders also use different criteria to qualify you for a mortgage, which means you may have an easier time getting approved versus a traditional lender. This makes private lenders a good option for Canadians struggling with bad credit or other hurdles that may prevent them from obtaining a mortgage loan from an A-lender.
What is a Traditional Lender?
A traditional lender, or an A-lender, is usually a bank or Monoline lender that operates across the country. You can apply either directly to a traditional lender or through a mortgage broker.
Traditional lenders are regulated by the federal government, meaning they must follow federal laws and regulations when processing a mortgage application. A-lenders will only lend to borrowers with good credit scores, reliable income and a sizable down payment.
The Differences in Mortgage Loans: Private Lenders & Traditional Banks
Mortgage loans from private lenders differ in a few key ways from traditional mortgages. Private lenders are not federally insured by entities like the Canada Mortgage and Housing Corporation, meaning less regulation and more risk — but the ability to get quick approval.
Some of the main differences between private and traditional lenders are:
- Interest rates: Private lenders often have higher interest rates to offset the higher risk of lending to someone who doesn’t qualify for a traditional mortgage.
- Fees: While many traditional mortgages have fees, private mortgages have higher than average borrowing costs.
- Terms: Most private lenders offer short-term mortgages. Private lender mortgages are often used as a short-term bridge toward a longer-term A-lender mortgage.
- Qualification criteria: Private lenders rely more on your property’s value and marketability and less on your credit score and financial profile to determine eligibility.
When to Choose a Mortgage Loan from a Private Lender
If you have poor credit, irregular income, or need to move quickly on a property, a private lender may be the right option. The flexibility in loan terms and faster approval process can make private lenders an attractive alternative, despite the higher costs.
Private lenders also cater to niche markets, such as real estate investors, who may need unconventional financing solutions.
When to Choose a Mortgage Loan from a Traditional Bank
Borrowers with strong financial profiles, including excellent credit scores, stable incomes, and low debt levels, will typically benefit from going through a traditional bank. The long-term cost savings from lower interest rates make traditional bank loans appealing to buyers who plan to hold onto their property for several years.
If you meet the criteria and have time to wait for the approval process, traditional banks are the best choice for affordable, reliable mortgage options.
Considerations When Working with a Private Lender
If you’re considering working with a private lender, keep in mind that they are not federally regulated, so it’s important to thoroughly read the documentation provided by the private lender. Having a real estate lawyer review the loan documents would be best.
As you are reading through the loan documentation, keep the following questions in mind::
- How high is the interest rate?
- What are the penalties for missed mortgage payments?
- What are the penalties if you want to get out of the mortgage early?
- Can you prepay your mortgage or make lump sum payments?
- What is the monthly mortgage payment, and can you afford it?
- What fees are associated with this mortgage?
Weighing the Pros and Cons
Choosing between a private lender and a traditional bank depends largely on your circumstances. Traditional banks are ideal for those who meet strict financial criteria and want long-term savings through lower interest rates. On the other hand, private lenders provide flexibility and speed, which can be beneficial for borrowers who face challenges in the traditional lending market.
Ultimately, the choice comes down to your financial profile, the type of property you’re buying, and how quickly you need to secure the mortgage.
HW Advantage Mortgage Loans: Private Lenders and Traditional Banks
Whether you’re seeking a stable, low-interest mortgage from a bank or the flexibility of a private lender, your mortgage choice will play a significant role in shaping your financial future.
At HW Advantage, we have relationships with over 35 qualified lenders, giving us various options to find you the lowest mortgage rates in Ontario. We also pride ourselves on providing flexible mortgage options—including bad credit mortgages—for communities in the Burlington and Oakville area.
HW Advantage can help you land the home of your dreams. Ready to see how we can help? Contact us today or apply directly for a mortgage online.