People typically turn to the private loan market because they are finding it hard to get finance from a traditional lender for reasons that can vary from having a bad credit history to being a highly-leveraged property investor.
So, let’s take a look at what a private mortgage is, what types of home loans private lenders can offer and what are some of the potential benefits and risks.
What’s a private mortgage?
A private mortgage is not issued by a bank or a traditional lender. Instead, the loan comes from an individual or business with access to a private pool of funds. Most private home loan lenders specialise in providing short-term financing.
There are four main types of home loans that private lenders offer. They are:
Bridging loans are short-term loans that borrowers typically take out when they want to buy or build a new home before selling their existing property. They are usually interest-only home loans that are repaid once you sell your existing property. However, bridging loans often come with higher interest rates. There are also risks to consider, including not being able to sell your home or not being able to sell it for the price you thought it was worth and falling short of what you owe on the bridging loan.
A caveat loan gives the lender an interest in your property, which means you are using your property as security for a loan. In other words, the loan is secured by a caveat against your house. It can be one of the quickest ways to get a loan when you are in urgent need of finance. The loan terms are generally very short and can be as brief as two or three months. Caveat loans often have higher interest rates. Private lenders usually will decide on how you can repay the money before approving the loan and this can include proceeds from a planned sale of your property.
Bad credit loans
Bad credit loans are typically sought out by borrowers who have a poor credit history, such as failing to pay bills on time, or defaulting on home loan repayments. These sorts of loans are sometimes used for debt consolidation. You can learn more about poor credit scores here. If you have a below average credit history, it means you pose a greater perceived risk to the lender when it comes to missing repayments and falling into arrears. Therefore, bad credit home loans typically come with higher interest rates to partly offset the greater risk to the lender. There are different types of bad credit home loans and they are usually a short-term fix that may allow the borrower to repair their credit history.
A second mortgage means you take out a home loan on a property that you already have a mortgage on. Sometimes parents get a second mortgage over their home to help their children buy their first home. If the worst were to happen and you were forced to sell your house, there is a risk that you may still owe money on the second mortgage. For this type of loan, the first mortgage is typically paid back before money goes towards repaying the second mortgage.
What are the possible benefits?
A private mortgage can be worth considering for house flippers who only need a loan for a short period of time and who are confident that they will be able to repay it on time. It could also benefit people with a poor credit rating or those who need a loan immediately and who are confident that their income will enable them to pay back their lender in the near future.
Some of the potential benefits include:
- Speedier settlements – The approval process can be quick and involve less paperwork than what’s involved with applying for a traditional loan. This can be useful if you can’t afford to wait for a loan.
- A good credit history may not be necessary – People who have a below average credit history and who may have been rejected by the banks, may find a private lender will do business with them.
- Specialised loans – Some private lenders may offer loan products that traditional lenders don’t provide, which can be a short-term solution for some borrowers.
What are the potential risks?
A private mortgage may be a solution if you’re not qualifying for a loan with the banks, but you will have to weigh up the risks and decide whether you can afford it.
Some of the risks can include:
- Higher interest rates – The interest rates can be higher than home loans on the mainstream market because borrowers with below average credit ratings are typically seen to pose a higher risk to the lender.
- Shorter loan terms – The lives of these sorts of loans are generally short. This can work against you if you don’t have the capacity to pay back the loan on time.
- A lack of features – Generally, they don’t offer features such as a redraw facility or an offset account.
How to find a private lender?
A simple Google search, joining a real estate investment club or talking to a mortgage broker can help you get in touch with a private lender.
Before committing to a particular loan, it may be a good idea to consider not just the interest rate on offer, but also any fees or other conditions associated with the loan.
Is a private mortgage right for me?
Like with any financial product, it best that you do your research, compare your options and carefully assess whether you can meet the repayments and other conditions of the loan. You may find it useful to talk to a financial planner before choosing to go with a private lender.
If you decide a private mortgage is not for you, then you may want to consider a traditional lender.
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