When it comes to securing the lowest private mortgage rates in Ontario, understanding the factors that impact your interest rate is crucial.
Private mortgage rates can fluctuate significantly based on various factors considered by lenders. By familiarizing yourself with these determinants, you can position yourself to access the most favorable private mortgage rates. This blog highlights seven key factors influencing your private mortgage rate and provides effective strategies for navigating them.
1. The Borrower´s Story
First, you should know that private mortgage lenders look at the borrower’s overall financial picture. It starts with you, your story and your plan for the property can significantly influence your private mortgage rate. Lenders are interested in your “story” as a borrower:
Creditworthiness: While private mortgage lenders don’t typically have a minimum credit score, they use credit score to price your mortgage. More on this below in the 7th factor, payment history.
Income Stability: Demonstrating a steady source of income can boost your credibility as a borrower.
Loan Purpose: Clearly outlining your plans for the property like, for example, you plan to refinance in one year to a B Lender or a bank because your credit score will be higher or you would have more equity down payment or you plan to renovate and flip it. Because a private mortgage is meant for a band-aid financing, not a long term plan.
If something smells wrong, if something feels wrong, the lender will give you a higher rate to mitigate their risk. They’ll price the deals accordingly. Therefore, have a clear vision of how you exit and why you need the loan.
2. Loan-to-Value (LTV) Ratio
Loan to value is the amount of mortgage that you are borrowing on this property divided by the fair market value (i.e. appraised value) of the property. The LTV ratio is a critical factor in private mortgage rates.
A lower LTV ratio typically results in better rates because it indicates less risk for the lender.
If you already have a $400,000 mortgage with your bank and you want to borrow another $200,000, this would mean you would be borrowing $600,000 in total.
Then, let’s say that your property was appraised for $1,000,000.
The LTV is calculated as follows:
($600,000 / $1,000,000) x 100 = 60% LTV
Typically, private mortgage lenders in Ontario can only lend up to 80% of the loan to value and the lower the loan to value, the cheaper your rates will be. When your LTV is less than 65%, that’s usually when you get the best pricing.
Different private lenders have different risk profiles. It’s very important to navigate and try to figure out what tier of the loan to value you fit into.
And, sometimes, some private mortgage lenders have pretty similar pricing for between that 65% to 70% and 75% to 75%. But usually when you get above the 75%, that’s when it gets incrementally expensive.
Consider these points:
- Lower LTV, Lower Risk: Aim for a lower LTV ratio by making a larger down payment or negotiating a lower purchase price.
- Property Appraisal: Ensure an accurate property appraisal to determine the LTV ratio. Here’s a short and detailed video on how to get higher home appraisals.
3. Property Value
The value of the property you’re financing is a fundamental factor. Lenders want to know that the property is worth the investment. Here’s what you should keep in mind:
- Appraisal Accuracy: A professional property appraisal can provide a precise value.
- Investment Potential: Highlight how the property’s value may increase over time due to location, renovations, or market trends.
Obviously an experienced mortgage broker like Effortless Mortgage will help you take a look at it and give you their assessment, how much it’s going to be worth. And they have appraisers they work with day who will be able to give you a fair assessment, a good valuation as well.
4. Property Location and Type
Property location and type matter in the world of private mortgage rates. Rural vs. urban areas, as well as the property’s use (residential, commercial, agricultural), can impact your rate:
- Urban vs. Rural: If it’s an urban or suburban property, the mortgage rate would be cheaper as urban properties are more readily marketed and sold faster rather than rural properties. Quick Tip: If there’s a zero (0) in your postal code, for example, “A0A”, it’s a rural property.
- Property Type: Residential properties are more popular for private lenders. It’s a lot harder to get private financing for mixed-use, commercial properties.
5. Loan Terms
Private mortgages often come with shorter terms than traditional loans. If you’re getting a six month term versus a 12 month term, the rate and fees might be different.
The six month term is usually for a bridge or for flipping, and the rates can be a little bit better.
It depends on the other factors all working together. The 12-month is more of a standard term. Usually most of the private mortgage lenders offer the 12 month term. We don’t see a lot of two year terms.
Some of the private mortgage lenders in Ontario have started to offer two year terms. Most commonly used term is one year.
While the mortgage rates might not be that different between a six month versus a 12-month term on a private mortgage, really the kicker are the lender fees.
Oftentimes you can get something that’s 30% or 50% cheaper on the fees if you’re getting a six month term.
For example, if you are getting a one year term private mortgage, the rate might be 8.99%, and the lender fee might be 2%.
And if you are getting a six month term, the rate might be 8.99%, but the lender fee could be 1.5% or even 1.25%.
On a $500,000 mortgage, you’d be almost saving $4,000! That’s pretty significant.
So if you’re just using it for a short term and you’re pretty sure – and you can get that paid out within six months, you don’t need a one year term.
6. Market Conditions
Private mortgage rates are not isolated from the broader financial market. Economic conditions, lender demand, and interest rate trends play a significant role:
- Economic Trends: Keep an eye on economic indicators that may affect interest rates.
- Lender Demand: Competition among private lenders can lead to competitive rates.
There could be periods when lenders are just not lending. That means if the property value is dropping pretty fast or private money is drying up, a lot of lenders will say, we’re going to pause lending for two, three months.
And then you have a bunch of lenders pulling out of the market. That’s when the rates get pretty expensive.
Within that, however, you can still find pockets of lenders who are open, they keep lending, and still want to do business. You really require someone who’s knowledgeable about the industry to help you find the deal even in a challenging environment.
At Effortless Mortgage, we deal a lot with private mortgages and, additionally, we have our own in-house private mortgage lenders who offer $0 broker fee. We keep our ears to the ground.
7. Borrower´s Payment History
Last but not least, your payment history and your track record of making timely payments can influence your private mortgage rate:
- Payment History: A strong history of on-time payments can demonstrate reliability to potential lenders.
- Credit Report: Check your credit report for accuracy and address any discrepancies.
If you have a current mortgage, private mortgage lenders specifically look at how you’re repaying your previous mortgage if there were some late payments, if your mortgage is already in your arrears, not to say that you won’t get approved, but the rates will likely be pretty high.
7 Factors That Impact Private Mortgage Rates in Ontario
Securing the lowest private mortgage rate in Ontario requires a holistic approach. Understanding the factors that impact private mortgages rates and strategically positioning yourself as a borrower can make all the difference.
Remember, your unique story, property details, and market conditions all play a role in determining your private mortgage rate. To dive even deeper into the topic of private mortgages, check out Understanding Private Mortgage and Private Lenders in Ontario
By staying informed, working with experienced mortgage advisors like Effortless Mortgage, and being proactive in managing your finances, you can maximize your chances of getting the best and lowest private mortgage rate that aligns with your real estate goals.
B lender mortgages, despite the misconceptions, have carved out a valuable space in the Canadian mortgage landscape, providing opportunities for borrowers from all walks of life to achieve their homeownership dreams.