In what is a very competitive market, most borrowers have literally hundreds of lenders and home loans to choose from. However, finding a suitable loan can be a bit more challenging if you don’t fit the standard lending criteria of traditional lenders. That’s when a private lender may be an alternative to consider. Let’s take a look at what a private lender home loan is, and the pros and cons worth weighing up.
What is a private lender?
People typically turn to the private loan market because they are finding it hard to get approval for a more regular home loan from mainstream lenders. This can happen for a variety of reasons, including having a poor credit history.
Private lender home loans are not issued by regular banks or traditional lenders. Instead, the loan may come from a specialist finance company, an investment firm or even individuals. The common thread across many private home loan lenders is that they specialise in providing short-term financing.
How do private lender home loans work?
In general, there are four main types of home loans that private lenders offer. They are:
Bridging loans
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 old home. Bridging loans can come with a higher rate than your regular mortgage, and a key risk is that if it takes longer than expected to sell your home – or it sells for less than expected – you could be left with a shortfall on the money owed on a bridging loan.
Caveat loans
A caveat loan gives the lender an interest in your property, which means you are using your property as security for a loan. A caveat loan can be a very quick way to get a loan, often with loan approval in a matter of hours, which can be attractive if you’re in urgent need of finance. In addition, the loan terms can be very short, often just 2-3 months, and you can usually expect to pay a higher interest rate compared to a standard home loan.
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 previous loan repayments. Having a few negative items recorded in your credit history means you pose a greater perceived risk to home loan lenders. Reflecting this, bad credit home loans typically come with a higher interest rate – and potentially higher fees, to compensate the lender for taking on more risk. On the plus side, if the borrower is in a position to consistently meet the repayments, a bad credit home loan can be an opportunity to start afresh, and gradually repair their credit history, which could mean being eligible for a traditional home loan further down the track.
Second mortgages
A second mortgage involves taking out a home loan on a property where there is already a mortgage in place. It’s something that may be an option for parents looking to help their adult children buy a first home. In general, mortgages have priority according to when they were lodged. So a first mortgage will typically take priority over a second mortgage. A key risk is that if the worst were to happen, and you were forced to sell your home, you may still owe money on the second mortgage.
Finding private lender home loans in Australia
An online search can help identify a variety of private lender home loans in Australia. Alternatively you could speak with a mortgage broker, who may be able to help you get in touch with a private lender.
Before committing to a particular loan, it’s a good idea to consider not just the interest rate on offer, but also any fees as well as special conditions associated with the loan. With this in mind, it could be worth comparing the offerings of a number of lenders before choosing one.
The pros and cons of private lender home loans
A private lender home loan can be an option for a variety of borrowers such as house flippers, who only need a short-term loan, and who are confident they’ll be able to sell the property quickly, and repay the loan on time. It could also be of interest to people with a poor credit rating.
There can be risks, however, and it’s important to weigh up the pros and cons of a private lender home loan. Here are some points to consider.
The potential benefits
Speedy settlements: The approval process can be very quick and involve less paperwork compared to a traditional loan. This can be useful if you need finance fast.
A good credit history may not be essential: Borrowers with a slightly tarnished credit history can be rejected by traditional banks, but may be eligible for a loan with a private lender.
Specialised loans: The types of loans offered by private lenders may not be widely available through mainstream lenders.
Possible downsides
Higher interest rates: The interest rates on private lender home loans can be a lot higher than mainstream mortgages simply because the lender is taking on more risk. As a guide, ADS Finance says private money lenders may charge interest rates ranging from 6% to 10% or even 10% to 15% in the case of a second mortgage.
Fewer options: If you’re shopping among private lenders, you will likely have fewer options available to you than you would if you were comparing mainstream lenders.
Shorter loan terms: The short-term nature of many private lender loans brings the risk of something happening that derails your ability to pay back the loan on time.
Is a private lender home loan right for me?
As with any financial product, it’s important to do your research, compare your options and carefully assess the costs and whether you can meet the repayments and other conditions of the loan.
Bear in mind, too, that a home loan of any sort, including one from a private lender, is a big financial undertaking. You may risk losing your home if you fail to keep up with your loan repayments. Therefore, if you have a poor credit history, it may be worth thinking carefully about whether now is the right time to apply, or whether you may be better off saving your money until you are more confident you’ll be able to manage a home loan financially.
If you decide a private mortgage is not for you, then you may want to consider a traditional lender.