The Canadian sub prime mortgage market slowed down considerably during the last recession with private mortgages being the only options in a number of cases.
Now in 2011, the institutional portion of the sub prime market is back in full force with more supply expansion coming into the market.
For the sake of a definition, we refer to sub prime mortgage lending as anything where a borrower cannot qualify for the main stream bank or institutional mortgage programs including insured mortgages for high leverage mortgage requirements.
Sub prime mortgage offerings most typically fit individuals with some form of distressed credit. Another term for this type of loan is a bad credit mortgage.
From the institutional side of things, credit unions and trust companies lead the way in providing sub prime residential mortgages.
Their main competition is from private mortgage lenders and for good reason.
In many cases, a sub prime mortgage offering from a trust company, for instance, can have a rate that’s similar to a private mortgage offering. When this is the case, then private mortgages should be considered before signing up for an institutional sub prime mortgage for a number of reasons.
First, an institutional sub prime lender typically requires the applicant to enter into a three or five year fixed interest term to get the best offerings. These will be amortized mortgages, so with a higher interest rate the payments are going to be considerable on a monthly basis.
Private mortgages are mostly interest only, so the payment burden to service the debt on a monthly basis can be considerably less.
Second, because institutional lenders are providing fixed interest terms, the prepayment penalties can be substantial if you have an opportunity to pay down the loan above and beyond the regular principal payments, or have the opportunity to refinance the mortgage at a lower rate during the interest term.
A private mortgage for one or two years can have a small interest only prepayment penalty or be completely open after a certain number of months have passed.
If you’re using a sub prime mortgage to finance a property while you’re getting your credit in order, then a private mortgage may be a better way to go due to the potential prepayment flexibility.
Third, a private mortgage can, on average, be put into place much faster than an institutional mortgage of any sort. So if you’re in a hurry to get a subprime mortgage in place, a private money loan through a private lender can end up being the fastest option.
If you’re in need of a sub prime mortgage for a residential property or would like to know more about your options, I suggest that you give me a call so we can discuss your requirements and review both the institutional and private mortgage possibilities.