Canada’s recently stricter mortgage rules forced more homeowners to borrow from private or alternative lenders, often at higher interest rates than would be available through a bank.

A recent report by land registry company Teranet found a significant increase in the share of consumers turning to private lenders for mortgage refinancings in the Greater Toronto Area (GTA). The percentage of mortgage refinancing transactions done through private lenders rose from 12% in the second quarter of 2016 to 20% in 2018, a 67%  increase.

The myths about private lending are numerous and varied. To identify and better understand the misconceptions about private lending, we invited Naila Manji @ Your Rate Girl  helps us debunk six common misconceptions about Private Lending.

SIX common misconceptions about Private Lending:

Myth # 1: Private lenders are shady and offering loans illegally

Truth: Private lenders loaning on the security of real estate must be licensed Mortgage Brokers.The process is legal, and your investment is secured by the borrower’s property as collateral. Private lenders are regulated by provincial lending laws. While private lenders are not regulated as strictly as bankers, there are rules they must follow. Private loans are also facilitated by a lawyer. The borrower and lender must sign a Mortgage Commitment letter that has been drafted by a lawyer.

Myth # 2: Private loans are the last option of desperate borrowers

Truth: This misconception most likely comes from the fact that private lenders consider a property’s overall value and marketability as opposed to simply the borrower’s credit history and finances. Unlike banks and other institutional lenders, private lenders are willing to overlook other shortcomings in a deal if the equity is sufficient. However, most private loan borrowers are savvy, successful individuals or businesses that happen to have a financial situation or investment opportunity that does not conform to the strict requirements of institutional lenders.

There are many reasons for borrowers to opt for private loans:

• You want to purchase an unconventional property that a prime lender or bank will not finance.
• You need fast financing and cannot wait for a long approval process.
• Your bad credit history means you are being turned down by conventional lenders.
• You only need a short-term loan.
• You have non-confirmable income that is preventing you from obtaining a traditional mortgage.

Myth # 3: Private lenders are just loan sharks

Truth: Private lenders are successful, experienced business professionals who are willing to invest their own money in loans that they believe will provide the best possible ROI. Because they are in control of their funds, they can make decisions about the loans directly. As small companies, most private lenders rely heavily on word-of-mouth, referrals, and a good reputation to bring in business rather than a large marketing budget. This means that if you do your homework, it is not difficult to tell the reputable private lenders from the dishonest ones.

Myth # 4: Private loans cost too much

Truth: While private loans do have higher borrowing costs than traditional financing, this is often cancelled out by other factors, such as obtaining funding quickly enough to take advantage of a discounted purchase price or to buy out a partner who is in need of fast cash. It is important to consider all aspects of the lending scenario to determine whether a private loan would benefit your deal.

Myth # 5: Private lenders approve risky loans

Truth: Private lenders are less likely to approve truly risky loans because they are lending their own money rather than someone else’s (as with employees of institutional lenders). A private lender will typically only approve loans against properties that he or she is able to ascertain the value of with a degree of confidence, no matter how financially solid or experienced the borrower appears to be or how strong his or her track record is. However, private lenders may be perceived as risky because their knowledge and understanding of the local real estate market will lead them to approve loans that others deem to be too high risk.

Myth # 6: Private lenders are trying to beat the banks

Private lenders are not a replacement for the banks nor are they trying to compete with the banks. If you are having trouble getting the money you need from a bank or credit union, a private lender can probably help you. Private loans are especially worth considering if you own your own property, and your credit rating is less than ideal by traditional banking measures; you can’t pass the mortgage stress test; or you want flexibility in the structure of the loan.

By taking a different approach to approvals, private lenders like the professionals at Your Rate Girl can help more homeowners get funded.