29 Apr
The concept of private lending is becoming increasingly popular in Canada for those who are looking to secure funds for a new home purchase or for the renovation of current home. With new mortgage stress test rules, it is becoming increasingly difficult for Canadians to obtain funds from traditional lenders, especially for those who are self-employed, first-time homebuyers and those who are credit challenged. As a result, the Bank of Canada has seen an uptick in the amount borrowers are turning towards private lenders, which can include mortgage investment corporations or individuals lending their own money.
Private lending is an investment method whereby the lender loans money to a borrower and secures it against real estate. In a most circumstances, the loans are short or medium terms between 3 months and 1 year. The lender earns profit by charging interest and often fees to the borrower which are paid on a monthly basis. In the case of payment default by the borrower, the lender has authority to recoup their funds by initiating power of sale on the property.
In order to become a private lender in Canada, it is important to comprehend the property value trends in Canada, especially in the areas in which the property is located. Furthermore, private lenders need to verify the true value of the property and must perform independent appraisals to check the condition of the house from both inside and the outside. Becoming a private lender will also require the individual to verify that the hired mortgage broker and the real estate agent are licensed so that risks can be avoided.
In addition, the private lender must fulfill all the legal requirements before lending funds to prospective borrowers. When becoming a private lender, there is no determined monetary condition which the individual would have to satisfy to become a private lender. There is also no minimum amount of money required as borrowers seek loans of all sizes, and it is up to the private lender how much they are willing to loan to a borrower.
Before becoming a private lender, the individual must have knowledge on how to structure a private loan. Private loans can be structured in different ways which is dependent on the conditions that are agreed upon by the borrower and the lender. However, the most basic components of a loan include:
- Principal amount
- Interest rate
- A maturity date.
Becoming a private lender can be an attractive opportunity for businesses and individuals because lending can provide a good return on investment and the profit earned can be saved for retirement or for future investments.
