Everyday, I open up my inbox and I see countless messages or promotions from Private Lenders – both individual’s and institutional privates, seeking to compete in this ever-changing mortgage landscape.
Gone are the days, you could call a private lender and ask them to fund your client’s troubled file. Now they are also requiring more paperwork (even when they say they don’t) and their rates and fees are getting higher and higher! Private Lenders are feeling the squeeze too!
Why is this?
For one the market cannot rebound or absorb the over-inflated numbers we were seeing from the last two years. For instance, clients who were over-bidding on properties and in some cases paying over $100,000 to get into that property are now looking for a way out. However, they are in negative equity situations, which means they are stuck with the their current lending options or selling at a loss to get out from the overwhelming debt.
For the lender’s point of view, if something goes wrong, how will the lender get their money back or sell the property and recoup if not all most of their funds they lent out? Furthermore, when you are in 2nd or sometimes 3rd position, you are the very last to get paid in a power-of-sale position.
I recently had this happen to me in a private lending deal. Last year, after doing a full work-up and due diligence on the borrower (even though he was a mortgage broker himself), I lent out $50,000 on a 2nd mortgage on a condo in Toronto. It was 90% LTV @ 18% interest – due to the inherent risk of the deal.
Everything was fine, until his renter (doing a RTO deal) went to close on the condo. He could not qualify under the new rules.
The property was a rental and he was ready to close, however the tenant buyer could not get a mortgage. Thus, we could not close. From there it became a slippery slope, which to cut a long story short ended up under power-of-sale. It took a few more months and the deal closed last week. I got most of my principal back and I am still owed about $5,000 in total including outstanding interest, fees and legal costs.
Since the new government rules of last year, the interest rate hike and the recent qualification rate hike from 4.64% to 4.84%, borrowers are finding it hard to qualify for a purchase and/or refinance and there also seems to be less private money to go around.
In the last six months, I have seen private lending rates on first go from 6.99-8.99% jump to 9.99 – 11.99% and seconds are now starting t 12-15% for the better files or borrowers. Fees have jumped from 1-2% to 4-6%. When you do the math, it is hard to fathom putting a borrower into these kinds of deals but sometimes you as the broker and they as the borrower have not choice as that is what has happened to the market, after the government dabbled without knowing full ramifications. While they have put a stop on bidding wars and over-inflated prices, in the effort to stop foreign buyers, they have also hurt the local resident buyer, who is now being faced to take on more debt with higher interest rates and fees.
So what does this all mean? That as lender’s tighten their purse strings, borrowers are going to feel the squeeze too because lenders are taking on more risk as the real estate market dips in value.
Vancouver rebounded from the changes to their market and values are once again on a steady climb – it remains to be seen, whether we will see the same in Ontario in the short or long run. However, if you are in need of private funds because you cannot qualify on the A or B side, you better be prepared to dig deep into your pocket as the rates and fees are going to be high!