John and Lisa, a couple from Toronto, recently completed a consumer proposal after struggling with credit card debt and personal loans. Their credit scores dropped significantly (John: 520, Lisa: 540), making it nearly impossible for them to qualify for a traditional mortgage with a bank.
They had been renting for several years but saw an opportunity to purchase a $600,000 home when prices dipped. They saved a 20% down payment ($120,000), but every major bank and credit union declined their mortgage application due to their recent consumer proposal and low credit scores.
How a Private Mortgage Helped
Since banks and “B” lenders (alternative lenders) would not approve them, I suggested using a private mortgage as a temporary financing solution to help them buy their home while rebuilding their credit.
- Loan Approved: A private lender approved their mortgage for $480,000 (80% loan-to-value).
- Interest Rate: They were charged 9.5% interest (higher than a traditional lender but still affordable).
- Interest-Only Payments: The lender structured the mortgage as interest-only for 1 year, lowering their monthly payment burden.
- Fast Approval: The private mortgage was approved in just hours, allowing them to close on the home.
What Was Their Exit Strategy?
Since private mortgages are short-term solutions, the goal was to transition to a traditional lender within 12-24 months. John and Lisa followed this plan:
- Rebuilding Credit: They consistently paid their mortgage on time and took out a small, secured credit card to improve their credit score.
- Waiting Period: Many banks require at least 2 years after a consumer proposal before considering a mortgage. By using a private lender, they bypassed this waiting period.
- Refinancing with a “B” Lender: After 18 months, their credit scores improved to 650+, allowing them to refinance into a B-lender mortgage at 6% interest.
- Transitioning to a Prime Lender: After another 2 years, they qualified for a bank mortgage at 4.5% interest, significantly reducing their payments.
Final Outcome
Without a private mortgage, John and Lisa would have been forced to continue renting for years while rebuilding their credit.
With a private mortgage, they were able to purchase their home immediately and work towards qualifying for lower-cost financing.
Long-Term Savings: Even though the private mortgage had a higher interest rate, they benefited from homeownership appreciation (their home increased in value to $650,000 within two years).
Key Takeaways
- Private mortgages provide a bridge for borrowers recovering from financial setbacks like a consumer proposal.
- They allow homeownership sooner instead of waiting years to qualify with a traditional lender.
- An exit strategy is essential—private mortgages are not long-term solutions but a stepping stone to more affordable financing.
Summary
John and Lisa, a Toronto couple, faced challenges securing a mortgage due to low credit scores after completing a consumer proposal. Despite saving a 20% down payment on a $600,000 home, banks and alternative lenders declined their application. A private mortgage provided a solution, granting them an 80% loan-to-value mortgage at 9.5% interest with interest-only payments for a year. This allowed them to buy their home immediately while rebuilding their credit. Within 18 months, they transitioned to a B-lender mortgage at 6%, and after two more years, they qualified for a prime lender at 4.5%. Thanks to this strategy, they avoided prolonged renting, benefited from home appreciation, and ultimately secured lower-cost financing. This case highlights how private mortgages serve as a short-term bridge for borrowers recovering from financial setbacks.
