What exactly is a private mortgage?

What exactly is a private mortgage?Originally posted on Mortgage Professional Australia

There seems to be some confusion with brokers about what a private mortgage actually is; so let me set the record straight.

I can understand why there is some misunderstanding with this as the lines can become a little blurred between non-bank, low doc, non-conforming and a mortgage fund.

A private mortgage is quite literally that, a mortgage that is funded via an individual, not a bank or an institution. Private mortgage lending dates back to roman times and is very similar now as it was then, with one-person lending money to another, in other words peer to peer.

In the past many legal firms facilitated private mortgages as they would often have high net worth clients wanting to invest their money, and other clients who wanted to borrow.

While not as many as in the past, there are still a number of legal firms offering private mortgages. It is however more challenging for them now as they are no longer able to act for both the investor and the borrower; this is considered a conflict of interest.

Some brokers call a private mortgage an “asset lend”. This is due to the fact that in the past many private loans would really only focus on the value of the asset being offered as security and while the borrower’s financial situation was noted, it was more to do with the asset than the borrower.

Times have changed and while the asset is still the primary consideration, the client’s financial position and their ability to service and repay the loan are more relevant than in the past. Having said that, paperwork and requirements are still minimal when compared to mainstream loans.

The best way to describe a private mortgage is as a sensible asset lend, meaning relevant questions about the borrower will be asked but there won’t be endless, and often irrelevant, requests for information and documents which often seems to be the case with the banks at the moment.

For the most part private mortgages are non-code, meaning they’re not designed for mums and dads to buy a house. They are typically commercial transactions such as for a business person wanting to raise capital, or a developer wanting to purchase or raise funds on a site. The key is business purpose which is good, as these are just the kind of loans the banks seem to have the most trouble with at the moment and is why private mortgages have become very relevant for brokers.

Private mortgages are typically short term, 12 to 24 months and are designed to provide a fast no fuss solution for a borrower seeking business related capital. For this reason, the borrowers exit strategy is important. This will often be the sale of an asset or a refinance with a mainstream lender following the loan term.

We are often asked if a private mortgage is safe for the borrower, an odd question really when they are the one that is being lent the money. Perhaps this is because some people think private mortgages come from the underworld and non-payment will result in a visit from thug on a Harley Davidson.

This is far from the truth as private mortgage investors are typically professional business people and the loans are documented via a registered mortgage that is prepared by solicitors. The security documents a borrower will sign are much the same as those a bank would produce.

Even though most private mortgages fall outside the code, if a loan does go into default, standard recovery action would be applied. Borrowers can take comfort in the fact they have the same protections with a private mortgage as any other non-code commercial loan.

While not the answer to every loan problem, a private mortgage can be a great way of securing business finance for a client when the banks have either said no, are asking way too many questions, or if quick settlement is needed.

If you haven’t already, align yourself with a good private mortgage provider as this will ultimately mean more options and more options mean more settlements which can only be a good thing for you and your clients.

Borrower Case Study: A super loan for a supermarket

PMA settled a loan with a borrower for the purchase of a supermarket Private Mortgages Australia settled a loan with a very happy borrower who needed a quick turnaround on finance for the purchase of a supermarket in country Victoria.

One of the key benefits of a private mortgage for this borrower was that PMA was able to lend based on the valuation price of the property rather than purchase price, which was ideal for the borrower’s situation. The supermarket had previously been bought three years ago for $950,000 however the borrower had managed to pick up the building and the business for a deep discount from a motivated seller for $680,000. This incredible discount was made possible because he agreed to buy the property very quickly and therefore didn’t have time for a traditional bank to take 6-8 weeks to approve a loan. While a bank would typically only lend on the lower of the valuation or purchase price, as a Private Money Lender, we are happy to lend based on valuation.

The valuation of the building came back at $950,000 and based on our due diligence we were happy to offer him a loan for 70% of the valuation of the supermarket being $665,000. The borrower needed the funds for four months to give enough time to refinance the property with another lender and cash us out.

Loan details

Loan Amount: $665,000

Mortgage Type: Registered 1st Mortgage

Loan to Value Ratio (LVR): 70%

Term: 4 Months

Managing the loan

We made sure we managed the deal as it came closer to the repayment date by sending the borrower a friendly reminder at 60 days, 30 days, and 14 days to expiry. This helped keep the lines of communication open and we knew exactly where the borrower was up to and had a clear view of his situation.

The borrower had a few unexpected delays from the incoming lender, but because we had constant communication with the borrower he was able to provide us with evidence of the new loan coming in and so we were comfortable giving him a small extension of two weeks to finalise his refinance.

Win-win

This deal was a great success for the borrower. He managed to complete the deal and make a huge profit. The borrower was so impressed with our service that he has subsequently came back and borrowed from us again  for a different project.

We are proud to say that we have many repeat borrowers just like the one in the above example, and this is because PMA provides a good customer experience with flexible criteria and our win/win approach to private lending.

If you’d like to find out more about how we can help you or your business clients with quick  access to finance then please give us a call on 1300 856 683.