What is a Good Rate for a Private Home Loan?
Although many Canadian homebuyers turn to private home loans because of less than perfect credit, there are actually several reasons why people choose private lenders over major financiers. The rate you receive on your private home loan depends on many factors such as your credit history, the property you want to buy, and even the amount that you can pay as a down payment.
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Average Interest Rates on Private Loans
Private lenders offer the highest interest rates out of all of the different home loan providers, including lenders who cater specifically to individuals with bad credit. The average rate for a private loan in Canada is between 10% and 18% with several factors influencing your exact rate. For this reason, many people advise using private loans as a last resort when banks and other lenders turn you down. Individuals, syndicates, and mortgage investment corporations all lend privately at varying rates, too.
Understanding a Private Loan
A private loan is much different from a traditional loan in that it is a short-term solution designed to help people with bad credit or other specific needs obtain the funding they need for a home. For the first one to three years of the loan, you only pay on the interest, which is considerable. Once that term ends, you still owe the lender the full principal balance on the loan.
Things Affecting Private Home Loan Rates
A private lender considers a few things before approving you for a loan. These include:
- The value and type of the property you want to buy. This helps any lender make better decisions and assess risks.
- Your income. This helps the lender determine whether you are able to make your loan payments on time over the course of the mortgage.
- The size of your down payment. You will need at least 15% down, but if you can pay more, you should. This means you have more of your own money invested, which lessens the lender's risk.
- Equity, if you are refinancing. The equity in your home is a prime factor if you want to refinance through a private lender. You can get up to 85% loan to value in most cases.
Aside from the high interest rate associated with this sort of loan, you should also expect broker fees. These typically top out at 3%, but you will not have to pay them up front. In fact, you can include them in your loan and repay them over time. Thus, if you borrow $100,000 and the fees are 3%, you can simply take out a loan for $103,000 to cover them. This may increase your payments slightly or even lengthen the time you make mortgage payments, but for those with bad credit or limited funds due to down payments, it is ideal.
In general, you should expect interest rates of between 10% and 18% depending on the economy, the lender, the property you want to buy, and your unique financial situation. Although private loans are expensive, they allow people who are turned away by banks to enjoy homeownership.