A private mortgage secures real property where the lender is not a mainstream or alternative institutional lender (such as a bank or credit union) but is a person or a private company. Private mortgages are often sought by a borrower after failure to secure a mortgage at a bank or other finance provider because of strict lending requirements imposed by these lenders. The borrower might be a first-time home buyer, a self-employed individual who can`t provide proof of a steady income or an experienced home-owner who is looking for an alternative to traditional lending.
How are Private Mortgages Regulated?
In order to protect consumers, the Ontario government has enacted a number of reforms to ensure that private mortgages are regulated by the Financial Services Commission of Ontario ("FSCO") under the Mortgage Brokerages, Lenders and Administrators Act, S.O. 2006, c. 29 (the "Act") and its accompanying regulations. Under this regulatory regime, consumers now receive greater protection than in years past, including regulatory oversight with respect to mortgage brokers who administer mortgages on behalf of third parties. Furthermore, private lenders are required to obtain a two year license unless they qualify for an exemption. Licensees may receive penalties under the Act, ranging from fines to imprisonment, if they fail to comply with its requirements.
What are the Benefits of Private Mortgages?
In many cases, private mortgages are a mutually beneficial solution for both the investor and the borrower. Frequently, the mortgage rate is high and the payback period is shorter than a traditional mortgage, but approval for the borrower is more easily obtained and the process is commonly quite short in comparison with a conventional mortgage.
What are the Risks of Private Mortgages?
Private mortgages carry serious potential risks for both the lender and the borrower. Both parties should not enter into a private mortgage without first retaining legal counsel to review all documents, and lenders must cautiously consider the condition of the property (including the cost of prospective repairs and renovations). Issues commonly handled by legal counsel include the negotiation and preparation of security documents and registration of the resulting mortgage.
While private mortgages are typically backed by registered security in real property, it is important to have this clarified with a lawyer and outlined in the written mortgage commitment before signing. An initial title search of the property, conducted by a lawyer, is also important, as the borrower may be over-leveraged or pre-existing security may already be registered. The transaction may be terminated (or default may occur) if there are any other liens, mortgages or interests registered on title to the property. The real estate lawyers at Merovitz Potechin LLP, in Ottawa, have significant experience advising lenders about the risks associated with specific private mortgage loan transactions.
Borrowers may also turn to legal counsel to assist with deciphering the fine print in a mortgage contract or commitment. For example, the private mortgage document may contain hidden fees, a variable mortgage rate with a high maximum rate, or other disadvantageous terms. It is important to be extremely cautious prior to signing an agreement. The experience of a seasoned real estate lawyer is invaluable.
Contact Merovitz Potechin LLP
If you are thinking of investing or borrowing by way a private mortgage, protect yourself and get the best advice by consulting a trusted legal professional. At Merovitz Potechin LLP, in Ottawa, our real estate lawyers have experience helping property owners and investors successfully negotiate private mortgage transactions.
Our real estate law team is ready to help you. To consult with a member of our firm confidentially, please email us or call us at 613-563-7544.