Getting a home loan through a private lender
Private lenders offer short-term mortgage solutions for home buyers who need fast settlement or have bad marks on their credit history.
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Private lenders differ from traditional lenders in that they have a private pool of funds, and assess borrowers on a different set of criteria. Most private lenders specialise in short-term finance solutions. They can help bridge the gap between your immediate need and your ability to secure more traditional forms of finance.
What types of finance do private lenders offer?
Private lenders generally offer niche products to borrowers in unique circumstances. As such, they tend to specialise in types of loans not often offered by traditional lenders.
- Caveat loans. A caveat loan is a fast-settling loan secured against a property. The loan gives the lender equity in the property until the loan is repaid. These loans are generally offered on very short terms of 60 to 90 days, and settle very quickly. Interest is usually prepaid and capitalised onto the loan.
- Bad credit loans. These loans are available to borrowers who may have had defaults or judgements listed on their credit files. Because the lender is taking a greater risk by extending credit, these loans usually carry higher interest rates. Bad credit loans from private lenders are usually a temporary solution to enable borrowers to repair their credit history with the goal of qualifying for a more traditional loan in the future.
- Bridging loans. A bridging loan allows borrowers to purchase or build a new home before the sale of their existing home. These loans are offered for short terms of six to 12 months. The loan is repaid when the existing property is sold.
- Second mortgages. A second mortgage allows borrowers to borrow against the value of their home, much like line of credit loans. The loan is registered on a home’s title subordinate to the first mortgage. This means if the home loan goes into default, the first mortgagee has first rights to recoup their losses before the second mortgagee. Because of the riskiness of these loans, they usually carry higher interest rates. Second mortgages also require the agreement of the first mortgagee to allow the property to be used as security.
What are the benefits of using a private lender?
- Easy approval. Private lenders specialise in lending to borrowers in unique circumstances. If you have bad credit or are self-employed and cannot offer proof of your income with PAYG documentation, private lenders may be able to offer a solution.
- Speed. Private lenders are usually able to offer extremely fast approval and settlement. This can be important for borrowers who need to settle their loan quickly or raise capital to take advantage of a business opportunity. Some private lending products can settle in a few days, versus several weeks for traditional home loan products.
- Specialised products. Private lenders generally offer highly specialised products that are seldom available through traditional lenders. For borrowers who need to begin construction on a new home before they’ve sold their existing home, who need to access capital quickly to take advantage of a business opportunity or who have suffered financial setbacks in the past, private lenders may be able to offer a solution.
What are the drawbacks?
- Higher rates. Because private lenders often focus on extending loans to borrowers with bad credit, their rates are higher to compensate for the increased risk. Some private lending products may also carry high fees. In some cases, private lenders can charge up-front application or set-up fees that borrowers could find themselves unable to recoup should their loan not go ahead.
- Shorter loan terms. While traditional mortgages are generally on 25- to 30-year terms, private lender mortgages are merely meant to fill the gap between securing more traditional finance, or to finance short-term solutions such as construction or the period between buying one house and selling another. Because of this, private home loans are usually offered for terms between three and 12 months, though some may go up to two years.
- Fewer features. Private lender home loans do not carry the features most traditional home loans offer, such as redraw facilities or offset accounts because they are offered as short-term lending solutions.
Get in touch with a mortgage broker for specialised help with traditional mortgages
If a private lender isn't the right option for you, a professional broker may help. They can help you get more conventional mortgages but also have experience dealing with borrowers in unique or challenging circumstances.Image: Shutterstock
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