Private Lenders vs. Traditional Lenders: What’s the Difference?

Becoming a first-time homebuyer in Canada can be an exciting yet confusing process.  

When it comes to financing your mortgage, in particular, it's essential to be fully aware of your options to make a decision best suited to your financial needs and goals, as well as your home-buying experience in general. 

That said, the two types of mortgage lenders you'll have the option of borrowing from are private and traditional lenders (also known as banks). In this article, we'll compare these two types of lenders to help you better understand which kind of loan will be right for you. 

What is a Private Lender? 

A popular alternative to traditional bank lenders, private lenders are typically funded by banks, private investors, or a combination of both. These mortgage lenders usually offer short-term, interest-only loans to borrowers who don't necessarily qualify for a bank loan to obtain their mortgage. 

Due to the higher interest rates on money borrowed from banks and/or the expectations from private investors to make a healthy return on their investment naturally plays a role in raising the overall expenses for the private lender, which is ultimately applied to the borrower. 

When Should You Choose a Private Lender? 

Fortunately for many borrowers, private mortgage lenders aren't closely looking at your credit score when determining your eligibility for a loan. They are more so interested in the value of your property. They also aren't going to turn you down if you have a non-traditional income, such as being self-employed. 

Private lenders in Ontario are also considerably more flexible with the kinds of loans they provide, generally allowing for some customization. They are also more flexible with the types of customers they loan to due to not being as regulated. 

They will also be able to provide you with your loan in a much shorter time frame, as less documentation is required, and approvals are generally speedy. 

Besides being generally more flexible in many ways, private lenders boast greater expertise than traditional lenders. They will be determined to work with you to find the best loan possible. 

Simply put, a private lender will offer a more customized and personal approach with more room for understanding and will do whatever is necessary to help you meet your financial expectations. Anyone setting out to purchase a home in Canada deserves nothing less. 

What is a Traditional Lender? 

A traditional lender (banks) collects funds from depositors, paying little to no interest, then lends this money to borrowers at mildly higher rates to make a profit. Before the introduction of private mortgage lenders, these traditional loans were the only way for borrowers to obtain a mortgage in the past.

Mortgage loans from the bank require borrowers to pay the principal and interest. They are generally longer-term loans with a much more strict approval process, unfortunately making them a non-suitable option for many people. 

When Should You Choose a Traditional Lender? 

Borrowers who are in no rush to close on their home, are confident in their financial history and income with a strong credit score and have all of the required important documents ready for presentation are likely to be good candidates for a traditional bank loan (although they will still have the option of going with a private lender). 

Moreover, banks may offer loan terms longer than that of a private lender (for example, they may offer a 30-year mortgage vs. a private lender only willing to provide a 10-year mortgage), which may be a more attractive feature for a homebuyer.

It is worth noting, however, that borrowers choosing a traditional lender for their mortgage should ideally not be self-employed or have a non-traditional income. Going with a conventional lender makes qualifying for this loan type substantially more challenging. 

It is also vital for borrowers to understand that there will not be as much flexibility in obtaining a loan from a bank compared to a private lender, including being required to choose from more limited, fixed loan options in-house. Furthermore, while the interest rates are generally lower with traditional bank loans, more fees may be involved - and these can add up to quite a hefty total. 

Choosing the Right Mortgage Lender Doesn't Need to Be Daunting 

Our mortgage experts agree that obtaining a loan from a private lender can be much more convenient for a borrower. Getting private lender loans can be a perfect option for homebuyers who are not eligible for a traditional bank loan due to their financial history, current income, or other factors - and in many cases, it just makes more sense. 

Let Our Private Lenders at Canadalend Help You Obtain the Right Mortgage. It's easy to find the perfect mortgage for your new Ontario home when you choose from our team of seasoned private lenders in Ontario. At Canadalend.com, we can provide an optimized mortgage solution that is financially beneficial and custom-tailored to your needs.

To learn more about our private mortgage solutions and financing options, call Canadalend.com at 1-866-I CAN LEND or contact us here.