Shadow mortgage lenders in Canada

Shadow mortgages lenders in Canada are alternative lenders, also called shadow lenders, operate in the margins outside the scope of federal bank regulations, offering short-term, uninsured mortgages at rates much higher than those provided by the banks.

While major Canadian lenders offer five-year fixed mortgage rates at about 2.5% to qualified borrowers, rates in the private market range between 7% and 12%.

Shadow mortgages lenders in Canada — identified by Postmedia through a review of B.C. civil court filings, lending documents and regulatory filings — include mortgage investment corporations, hedge funds and private lenders such as realtors, crowd funding companies, real estate lawyers and mortgage brokers.

In many cases, the private mortgages are financed by fellow Canadian wealthy investors and high net-worth individuals seeking higher returns than those provided by the stock markets.

Legal practice

The practice is legal, and can be done through a person-to-person loan, in which the lender is named as a lien holder on the mortgage, or through a Mortgage Investment Corp, in which investors can pool their money to lend to those who either don’t qualify for a traditional loan.

In Ontario, Canada’s most populous province, private lending accounts for about 4% of new mortgage originations, or $1.1 billion, or 2%, of total mortgage lending by dollar value, according to Teranet.

Its customers tend to be people looking for short-term mortgages, home renovation loans or debt consolidation. Their ranks include borrowers, many self-employed, who want to cash in on the real estate boom but have been shut out by a banking sector increasingly preoccupied with risk.

Fortunately, Canada’s true shadow lenders, which perform a vital role for first time home buyers, by the way, represent a tiny fraction of mortgage lending, a fraction the Bank of Canada correctly surmises does “not pose systemic risk.”

Whether it’s a bank, a trust or a private investor, when your mortgage lender gives up on you, the balance of power shifts heavily in their favor. They hand your file over to a lawyer, whose first move is to serve you with a Notice of Default demanding that you bring the mortgage back into good standing within 30 days. If you fail to pay up, your lender has a choice to make: foreclosure or power of sale.

Under foreclosure, your mortgage lender evicts you and takes title to your property, including all your equity. Power of sale is a different kind of default remedy: rather than taking title to your home, your lender simply sells it from under you and uses the proceeds to pay off your debts: mortgages, property tax arrears, property liens.

If there’s any money left after everyone’s been paid, you get to keep it; if not, your lenders can still come after you for any remaining balance on your mortgage loan.

Foreclosure has become increasingly rare, because it can take up to eight months and incur thousands in additional fees. Power of sale is cheaper and quicker: the whole process can be wrapped up in less than four months. It begins with a registered letter, titled Notice of Sale Under Charge, which gives the homeowner one last chance to bring the mortgage back into good standing. The Notice of Sale is a sobering ledger of indebtedness: its line items include the entire principal of the loan, all outstanding interest, late fees, administration and maintenance fees, interest on arrears, next month’s installment (which must now be prepaid), property taxes and the lender’s legal costs, which, per standard procedure with any mortgage, are passed on to the borrower.

Basically, using the “shadow market” is using a private lender. Often just your average Canadian, these lenders lend to get a higher rate of return. Most of the prospective lenders mortgage their own homes, and they do so at a three-to-four per cent interest rate. Then they turn around, take that money and lend it to other people (in this example, you) for 9-to-10 per cent — and presto, money!

Here’s when getting a Shadow mortgages lenders in Canada makes sense:

• You are purchasing raw land or a unique property that traditional lenders won’t touch because it’s outside their lending criteria;
• You are looking at buying a property to flip or a home that is in major disrepair, and need the funds to do the renovations;
• You have been recently laid off or have lost your job for another reason, and you need money to tide you over while you are looking for a new job;
• You need access to equity in your home and the penalty to break your current mortgage is too high;
• You have credit issues such as a consumer proposal or bankruptcy and it is preventing you from getting a mortgage for the full amount that you need from a traditional lender and you need a “top up”;
• You need to consolidate high interest debt, and due to bruised credit, you have been turned down by traditional lenders;
• A divorce, illness or some other life-changing event has had a major negative impact on your credit rating or low income, and you need mortgage financing until you get back on your feet;
• You need to take out equity from your property to get back into good standing with an existing mortgage that is in arrears, power of sale or foreclosure;
• You are interested in purchasing a new home, you have a sizeable down payment, ideally at least 15% of the property value;
• You have an existing property with a small mortgage that leaves you with a fair amount of equity in your property. Ideally you want the total of your existing mortgages and the new one to be at least 80 per cent of your property value or less.

Shadow mortgages lenders in Canada are regular people who might be investing their own cash for better return. They understand the risks and rewards. Professional Canadian real estate investors prefer to use private funds even though they are bit expensive. On the other hand they all can be claimed as expenses.