What Is A Private Home Loan Lender?
Private home loans are not issued by traditional banks or lenders. Instead, the funds come from specialist finance firms, investors or even individuals. Private home loans work in the same way as a traditional loan, but you’re not bound by the strict servicing requirements.
Private home loans are usually taken out for short-term financing.
Most private mortgage lenders provide secured loans, which means they look at whether you have an asset with sufficient equity to act as a security. They will lend against the asset. The credit risk you pose is not an issue with them.
What Loans Do Private Mortgage Lenders Provide?
Private lenders specialise in short-term financing, but that’s not all they provide:
- Bridging loans: These are short-term loans that you use when you’re buying a new property while also selling an existing property.
- Caveat loans: If you’re in urgent need of funds and already own property, you can apply for a caveat loan. You use your property as security to get approved for a home loan. The term for a caveat loan is less than one year.
- Second mortgages: You take out a loan on a property that already has a mortgage on it. The first lender has precedence in case a borrower defaults.
- Bad credit loans: Borrowers who are considered risky by banks can get a bad credit loan from a private lender.
Who Uses Private Lenders?
People who use private lenders are asset rich but cash poor. They borrow against their assets because they require urgent funds to bridge a shortfall:
- House flippers, as they need only short-term finance and are confident they can sell their properties quickly.
- Small-business owners, when there’s a shortfall in funds.
- Property developers who need finance in the short term to acquire new sites.
- Newly formed businesses with no financials to report
- A borrower looking to buy an unconventional property that a bank won’t finance
There are instances when private lenders will help finance your property goals if you don’t own a property. However, the interest rates are very high. For borrowers with bad credit, there are specialist lenders that can help, so a private lender should be a last resort.
Are Private Lenders Good?
It’s best to use private home loan lenders for short-term finance solutions that fill an immediate need for money that bridges a gap. These lenders can secure money faster than banks.
| Advantages of private home loan lenders | Disadvantages of private home loan lenders |
|---|---|
| Flexible and fast settlement, as they don’t scrutinise as much as a bank | Most of them provide secured lending, so if you don’t own property, private lenders are not a good option |
| Short-term financing so you pay off the loan quicker | Their interest rates are very high |
| They do not look at your credit history and lend to you based on your asset position | Most private lenders can only lend you up to 80% of a property’s value, so it’s not a good option for those with little to no deposit |
| They offer very specialised loans that are not available in most banks | The features on the loans are limited and they do not come with redraw or offset accounts, since the loan term is short |
Since banks can be quite conservative and turn down people who have minor blemishes on their credit file or were not employed for a long period, private lenders can help.
However, at Home Loan Experts, we know lenders who take a commonsense approach to lending. Even if you’ve been in your job for less than a year or there are some defaults on your credit file, we can help you get approved with a bank. Call us on 1300 889 743 or enquire online.
Remember, for most borrowers, private lenders should be the last resort, if you can’t get approved by banks or specialist lenders.
Is Private Lending Safe?
Yes. Contrary to popular belief, private lending in Australia is safe, as they’re governed by the laws and practices used to govern banks.
Also, you can work with a reputable mortgage broker to weed out any shady dealers and find private lenders who are safe and legitimate.
How Much Does A Private Lender Charge?
Private lenders usually charge the same fees as traditional lenders. So the expenses involved include application fees, valuation fees, legal fees and loan establishment fees.
However, since their interest rates are high, private home loans are expensive. Their interest rates start from 6% and the interest charged depends on the loan amount and how much you’re looking to borrow.
How Does A Private Mortgage Work?
The private lender provides the funds to the borrower based on the borrower’s security. The lender will check the security provided and decide how the loan is to be repaid.
The lender usually uses a conservative valuation of the property, in case the borrower fails to repay the loan on time and they need to sell it. The set time is usually less than 2 years, at a fixed interest rate.
Terms of a private home loan include:
- Type of loan
- Loan term
- Interest rate (negotiated by lender and borrower)
- Exit strategy
Are Private Lenders Better Than Banks?
Private lenders can be a better alternative for borrowers under certain conditions. Private lenders do not follow strict credit guidelines to lend you money, but there are limitations on when you can use them.
- Private lenders do not check credit scores
- Private lenders do not hold a banking licence, so they are considered non-bank lenders
- They lend money based on a borrower’s assets not credit
- Private lenders are vulnerable to economic conditions and are volatile when a crisis hits.
- There are some that lend to people with bad credit, but a better option might be to choose a specialist lender
| Point of difference | Private lenders | Banks |
|---|---|---|
| Interest rates | They charge a higher interest rate since they deal with higher risks. | They charge a lower interest rate compared with a private lender |
| Turnaround time | Faster, since they don’t ask for documents | Slower, since they ask for documents that take time to review |
| Approval process | Easier approval process | They look closely at your financial records, so the approval process is longer. |
| Loan options | Options are limited but are great for borrowers with short-term finance needs | A variety of options are available and some specialist lenders can help bad-credit borrowers or those who are missing documents. |
How To Find A Private Mortgage Lender
- Ask your friends and family members for referrals
- Real-estate professionals might have some amid their contacts
- There might be investors that are looking for an unconventional opportunity
- Take the help of a mortgage broker.
At Home Loan Experts, we can explore your mortgage options with banks first, before going to a private lender. We have a panel of over 50 lenders, comprising banks, specialist lenders and private lenders. As banks offer better rates and specialised products for borrowers in unique circumstances, we will make sure you’re getting the right deal on your home loan. Call us on 1300 889 743 or enquire online today.