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Private Lender Mortgages

Learn with Savvy about private lenders, how they work and when they may be able to help a borrower who needs cash quickly.

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, updated on August 8th, 2023       

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If you’ve had trouble getting approved for a home loan and feel that all finance avenues are closed to you, a private lender mortgage may be the answer to your short-term financial needs.  Find out all about private mortgage financing and the pros and cons of applying for one with Savvy.  We compare lenders to bring you the best loan interest rates and features in Australia.

What is a private lender mortgage?

Private lender mortgages are offered by specialist finance companies, investment companies or even individuals who make it their business to loan money to borrowers who don’t fit the standard criteria required by banks, credit unions or more traditional lenders.  They frequently provide short-term financing for very specific or urgent needs, rather than long-term home loans.  The types of products that are generally offered by private lenders are:

  • bad credit loans – assisting borrowers who have a poor credit history, a history of bankruptcy or who’ve been refused credit by other lenders due to credit-related issues
  • second mortgages – if a borrower is wanting to take out a second mortgage on a property and their existing lender is unwilling to approve further finance due to risk considerations
  • bridging loans – which include short-term loans to assist borrowers who may be in between selling one property and buying or building another. If settlement dates between selling and buying don’t match up for whatever reason, bridging loans can help span the gap between when property settlement funds are due and when they’re received
  • caveat loans – these are business loans based around placing a caveat on the title deeds of a property. A caveat is a legal notice that a party (in this case, the lender) has an interest in the property.  They can be put in place very quickly (often in a matter of hours) and can provide short-term ‘emergency’ funds until a more permanent business financing solution is found
  • time-sensitive, urgent private loans required in hours, with the borrower being unable to secure approval in the required time from a traditional lender – usually with security to other property required

Do private lenders charge much higher interest rates than banks?

This will depend on the individual situation – however, in general terms, you should expect to pay higher mortgage rates if your borrowing need or profile is considered to be higher risk than average.  If you’re a low-risk customer with a good credit score and full documentation, the chances are you will approach a traditional lender for your finance needs.  You may also simply pay a higher rate because these loans are offered by specialist lenders who set their minimum rates higher than other, more conventional lenders.

However, exceptional circumstances can arise when a prime borrower has too little time to get approval from their existing lender; for example, if a property auction is to be held and home loan approval has been received, but the money has not yet arrived in time for the auction.  In cases such as these, private mortgage financing can assist to save the day and the interest charged may not be much higher than a loan from a conventional lender.

In what circumstances do people use private mortgage financing?

There are many different reasons why people may urgently need funds which can’t be provided in the required timeframe by traditional lenders.  Such reasons could include:

  • natural disasters such as cyclones, floods or bushfires which leave property owners or farmers with an urgent need for finance but no access to their paperwork or time to make a conventional loan application
  • unforeseen opportunities which may suddenly arise and are ‘too good to turn down’, such as an urgent clearance sale or auction where a bargain is available to a cash buyer
  • unexpected delays, hiccups or cost blow-outs on building projects which leave a developer needing urgent funds to get the project finished in time to avoid late penalty fines
  • difficulties with the timing of a property purchase – if funds are promised and accounted for, but are unexpectedly delayed or don’t arrive in time for a settlement to take place

The pros and cons of private lender mortgages

PROS

Very fast loan approvals

Settlement can take place quickly, sometimes in just a few hours

Less or no reliance on prior credit history

Less background scrutiny involved of borrowers’ past lending history

Financing available for specialist or unusual loans

Where other lenders have said ‘no’, a private lender may say ‘yes’

Funds can be provided with less paperwork needed

 Far fewer hoops to jump through to get the funds you need compared to the paperwork required by a standard lender

CONS

Much higher interest rates and fees

Far higher interest rates and fees charged, especially for high-risk loans

Only fixed interest rates offered

No variable rate loans offered, only fixed-interest and fixed-term

No additional features available

No additional features such as offset accounts or redraw facilities are offered by private lenders

Only short-term loans offered

Loans only approved ranging from hours or days, up to  approximately three years, so refinancing will be required

Property often required as security

Private lenders may not be able to assist first homebuyers with no security to offer

Private mortgage financing – frequently asked questions

What paperwork will I need to provide for a private lender mortgage?

Private lenders will generally take a more personal approach to the borrower’s needs and will only require minimum paperwork compared to a full loan application to a bank.  However, full proof of identity will still be required, plus proof of ownership of the property being offered up as security for the loan.

How much will I be able to borrow with a private home loan lender?

Private home loan lenders in general are prepared to offer an 80% loan-to-value ratio (LVR), although some may be prepared to offer as much as 100% of the cost of a property as long as sufficient security is provided. There’s no real minimum or maximum loan which a private lender may agree to provide, as all applications are treated on an individual basis.

If I take out a second mortgage, who gets paid first if I can’t make the mortgage repayments?

If a default on a property loan occurs, the first lender to register a mortgage on that property is always the first to receive any proceeds from the sale of the property.  The second lender will only get paid once the first lender has received payment in full.  For this reason, second mortgages are riskier than primary or first mortgages.

Can I finance first with a private lender, then refinance when my situation changes or improves?

Yes – private home loans are often used as a short-term or ‘stop-gap’ measure to tide the borrower over until a more permanent or long-term conventional loan can be arranged.  Those with a poor credit history can use private home loan lenders to start repairing their credit record by seeking approval for a loan and then establishing a track record of regular on-time payments.  A conventional lender may be persuaded to approve a home loan based on proof of several months of timely loan repayments and give you access to a better overall deal.

Are private money lenders regulated and safe to use?

All credit providers in Australia must comply with responsible lending conduct as described in the National Consumer Credit Protection Act 2009 (known as the National Credit Code).  The Australian Securities and Investments Commission (ASIC) is the national regulator for credit providers in Australia and anyone offering credit is required to hold a credit licence with ASIC (or authorisation from a credit licensee).   Before engaging with a private lender or agreeing to a private lender mortgage, it is important to check the lender is a registered credit provider with ASIC.  Strict penalties apply to anyone offering credit in Australia without a credit licence (or the authority of someone who does hold a credit licence).

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