Ontario regulator is expecting the use of private mortgages to increase and wants to ensure people don't make a costly mistake
An expected rise in the use of private mortgages could lead to costly mistakes if people don’t understand how they differ from traditional home loans.
That’s the warning from Ontario’s financial services regulator which says that a knowledge gap could be dangerous for those who may not be eligible for a standard mortgage.
Polling from the Financial Services Regulatory Authority of Ontario (FSRA) reveals that 54% of homeowners believe that private mortgage payments reduce the principal as well as interest, although many times it will only be servicing interest on the loan.
"With rising interest rates, high inflation, and a slowing economy, more consumers are struggling to qualify for a traditional loan,” said Huston Loke, FSRA's Executive Vice-President of Market Conduct. “It's critical that homeowners who enter into private mortgages fully appreciate how their loan works, the pros and cons of the arrangement, and the true cost of a private mortgage."
Private mortgages may appear attractive to self-employed people or those without a steady income and many believe they will get more flexible terms than a traditional loan.
But the costs can be greater, although most respondents (66%) are not willing to pay more in lender fees or broker commissions to get a private mortgage.
"Mortgages from private lenders often come with different terms and conditions than traditional bank mortgages," said Loke. "Higher lender fees, interest-only conditions and shorter terms are just some of the things you may need to navigate,” added Loke.
Perhaps sensing that it could be riskier, 80% of respondents believe it is important to have an exit strategy to move from a private mortgage to a traditional mortgage.
Loke says that private mortgages should be a short-term stop gap rather than a long-term solution.
The dollar value of private mortgages brokered by licensed mortgage brokers in Ontario increased by 72% from $13 billion in 2019 to $22.4 billion in 2021.