What are your options if you have a property owner with a less than perfect past who needs finance fast?
Picture this, you have a client that wants to raise some finance fast. They have a property, however they have a less than perfect past and they cannot provide the usual paperwork. What are your options?
Well, given you can get them past a bank, you could look at a refinance, but timing might be a problem if funds are required quickly.
You may be able to look at a second-tier lender that can settle a little faster with less paperwork, however, if your client has a current mortgage at a low rate they understandably might not want to replace the whole loan with a higher interest rate.
From this point the options tend to run out quite quickly and many brokers end up losing the deal as they don’t know where to turn. This is where having access to private second mortgages can be handy and potentially deal saving for a broker.
Private mortgages have been around for a long time; in fact, they date back to Roman times. A private mortgage is essentially a peer-to-peer loan with an individual providing funds to another, typically secured over real estate.
In the past many legal firms were actively involved with private mortgage lending as they would often have high net worth clients that wanted to invest their money. Regulation has all but stopped legal firms providing private mortgages but there are still many investors that actively lend on mortgage transactions, and in many ways the private mortgage market has never been stronger.
The main reason for this is the retraction of mainstream credit and poor returns on bank deposits.
While most would prefer to invest into a first mortgage, there are some investors who are less risk adverse and will lend on a second mortgage due to the higher return.
As a rule of thumb private second mortgages range from 12% to 20% depending on the risk profile. Loan to value ratios are typically limited to 70% of the security property’s value and loans are written over 12 to 24 months and must be non-code. Loan sizes for private second mortgages can range from relatively small amounts to hundreds of thousands of dollars.
While some may say the interest rate for a private second mortgage is high, keep in mind that the client will not need to move their first mortgage to a potentially higher rate, and they will only be paying the interest over a short period. In the majority of cases, the benefits of a second mortgage will out-way the cost for most clients.
As the banks can sometimes be less than understanding with self-employed people, private mortgages are often utilised by businesspeople who are wanting a fast, low fuss funding solution. In many cases a private second mortgage can be settled in as little as 14 days, less if the investor is willing to settle via a Caveat over the security property, so speed can be a real plus with this type of lending.
One of the biggest considerations when assessing a client’s suitability for a private mortgage is the question of how the loan is to be retired upon maturity.
While a private second mortgage can be a good solution for the right client, they are designed to get people out of a jam or to be able to take advantage of a situation where funds are required quickly and are not designed to be a long-term loan product.
While some investors will agree to renew a loan, it is best if the borrower retires the debt following the loan term and for this reason the borrower’s exit strategy is very important.
Perhaps it’s a refinance or the sale of an asset; whatever the exit strategy is, it needs to be considered before securing a private mortgage for your client.
The advantage of a private mortgage is the fact the security being offered is the prime consideration. While ability to service and the character of the borrower is important, the focus is on the asset.
Due to this, investors can be flexible and are not bound by strict rules-based lending policies like the banks. Investors know there is a reason the borrower is applying for a private mortgage which is usually because they cannot qualify for a bank loan, typically due to them not being able to document ability to service in a traditional fashion or perhaps some credit or loan hiccups.
While a private mortgage is not the answer to every loan problem, they do provide a viable solution for certain borrowers. Next time you’re faced with a less than perfect client that needs funds fast, don’t run for cover as a private mortgage might be just what your client is looking for.
John Dickinson
ComDirect
