Frequently asked questions about mortgages
Read our frequently asked questions relating to private mortgage lending in Ontario, Canada below to better understand what you can expect from Morrison Financial.
Private lending in Ontario
Banks primarily offer mortgage loans for general residential purposes such as purchasing or refinancing a home. Loans from banks are offered at lower interest rates but they tend to have strict qualification criteria. Specialized loan offerings with banks, such as construction loans, will have strict requirements for qualification, conditions, and ongoing management of the loans. For example, the borrower needs to have a sufficiently high net worth relative to the loan amount, the builder needs to have strong and demonstrated construction experience, the loan amount needs to be low relative to the project cost and value.
Private lenders are considered alternative lending vehicles to banks / institutional lenders. A private lender typically offers mortgage loans for a wide range of purposes including purchase and refinancing of a home, land acquisition, bridging, and construction, and with less stringent qualification criteria than banks do. This flexibility makes private lending a great option for individuals that are considered too “risky” based on traditional measures. Loans with private lenders tend to be more tailored to an individual borrower’s needs but have higher interest rates to account for the higher perceived risk.
Morrison Financial is a private lender primarily servicing Ontario for various types of real estate transactions.
A standard residential mortgage loan involves the purchase or refinancing of a property that has already been improved with a residential structure (e.g. a home, a condominium unit). A construction loan is used to fund the cost of building a structure on a property. The structure can be a single family residential dwelling, multi-family residential dwelling, warehouse, commercial space, etc. Depending on the project, construction loans generally have a one to three years loan term with no amortization (interest only payments, which often are capitalized to the project budget). Construction loans are considered higher risk as the value of the property is tied to the success of the project. Hence, a construction loan is typically based on cost in place and advanced based on construction stages.
Mortgage loan can be used for various purposes including purchase of a property, refinancing of existing property, land acquisition, construction, renovation, bridging loans, or debt consolidation.
Anyone! Borrowers at banks / institutional lenders tend to have strict qualification criteria but private lenders offer a variety of debt financing options that most individuals can access. Beyond traditional lending metrics such as credit score and personal net worth, private lenders tend to put greater emphasis on the loan / project.
Private lenders get paid the same way the banks do. We earn a spread between the cost of money raised from investors and the interest rate charged to borrowers. Since the loans that private lenders underwrite are considered higher risk, our cost of funds to investors are also higher than that of the banks.
How the loans are assessed at Morrison Financial
You can learn more about the asset classes that Morrison Financial fund on our mortgage lending guidelines page.
Morrison Financial primarily assesses and funds mortgage opportunities in the Greater Toronto Area, Kitchener-Waterloo, and Niagara regions of Ontario. Nevertheless, we have also funded many deals across other regions in Ontario. Learn more on our mortgage lending guidelines page.
Minimum and maximum loan size are determined on a case by case basis. We typically fund mortgage deals in the range of $500,000 to $15,000,000. Morrison Financial has funded larger loans through syndication and will be open to a discussion if you require a loan amount beyond this range.
Loan to Value and Loan to Cost parameters depend on many factors including property type, loan purpose, and location. Learn more at our mortgage lending guidelines page.
The loan to value (LTV) ratio measures the ratio of loan amount to the value of the property, and is one of the criteria taken into consideration when funding an opportunity. To calculate the LTV, the total loan amount is the numerator and the property value (net of HST) is used as the denominator. A lower loan to value generally indicates a lower risk.
In a construction loan, the denominator will equate to the project value less any purchaser deposits used in the project and deferrals.
The “As-is” value is the current value of the property in its present condition. This value is generally used when underwriting purchase / refinancing loans. For a construction project, the “As-is” value typically refers to the land value.
The “As-site serviced” value is the value of the property once site-related activities such as excavation and grading are complete and infrastructure such as roads, utilities, and sewer systems have been put in place. A site-serviced land is deemed to be ready for construction.
The “As-complete” value is the property value once the final structure has been completed. The “As-complete” value is often referenced for construction loans or loans used for renovations.
Yes, at the borrower’s expense. An appraisal is a professional opinion prepared by a qualified appraiser to estimate the value of a property / project. The document is always required by the lender to assess the opportunity to qualify and provide a competitive loan offering to the borrower. The appraised value is typically used in the loan to value calculations. In addition, the appraisal will let you know the estimated price and condition of the property that you are looking to purchase.
Connect directly with us for a list of recommended appraisers that you can use.
Loan to Cost measures the total loan amount relative to the purchase price or total development cost of the project. The metric helps lenders to better understand risks in the event that the loan defaults or the construction is not completed.
Private lenders tend to put a greater emphasis on Loan to Value and Loan to Cost than debt service ratios. However, on a case by case basis, we will also review debt service ratios to ensure that the borrower has sufficient equity to fund projects / service debt.
Yes, once the commitment letter has been signed, we will get your authorization to pull your credit bureaus as part of our due diligence process.
Most banks / institutional lenders will require a warranty approved builder for construction projects. Although a private lender views a warranty approved builder favourably, this is not a requirement for most projects. Private lenders will conduct additional due diligence including review of an executed build contract and/or requiring a cost consultant / project monitor throughout the project duration.
There are several exit strategy that can be considered:
Sale of the property: Upon completion of the project, the borrower can sell the completed property and use the proceeds to pay off the loan.
Construction take-out: The borrower has existing debt on land and is looking to start construction on the property. The construction loan can be structured to retire the existing land loan.
Mortgage refinancing: After project completion, the borrower can go to a bank or institutional lender to refinance the construction loan at a lower interest rate. This approach is common for developers who plan to retain ownership and/or rent out the completed units.
Thinking of borrowing? What you need to know
Yes, but this will depend on the outstanding amount of the existing mortgage. Private lenders can take a subordinate mortgage position (i.e. second mortgage) on your property. The second mortgage amount will be determined based on the value of the property and the outstanding first mortgage loan amount.
Second mortgage position is a mortgage registration that is subordinate to the existing first mortgage. Second mortgage is of a lower priority mortgage than the first; hence, in the event of liquidation or default, the second mortgage lender will only get paid after the first mortgage lender has been paid out. The risk associated with a second mortgage is higher and this is compensated by a higher cost of borrowing.
Depends on the type of project. For development projects, it is common for the loan interest to be capitalized (interest payment through interest reserve). Whereas, it is more common for debt to be serviced monthly for purchase/refinancing loans.
Servicing debt through interest reserve is a rather common practice for a construction loan to help ensure that the Borrower can make interest payments during the construction term. Interest reserve is essentially a capital account where a predetermined amount of money for interest payment is deposited as part of the first construction draw. At the time when each interest payment is due, the lender will draw from this account for interest payment. The interest payment amount is accrued until the loan is paid out by the Borrower at the end of the term. This works well because a borrower tends to have limited cash flow during a construction project to service the debt and will only have money once the project has been completed. Note that the amount held in the interest reserve will not be subjected to interest accrual until the respective loan amount is drawn by the borrower.
Condition precedent refers to conditions that have to be met before the loan can be advanced. Condition precedents can vary significantly depending on each loan. Some common conditions include appraisal reports confirming the property/project value, review of borrower’s personal net worth, achieving a certain presale requirement for construction projects, receival all permits and approvals required to start the project.
In addition to registering freehold mortgage and charge on the subject property, the lender will typically require but not limited to:
- General assignment of rents and leases
- General security agreement
- Postponement of shareholder and credit claims
- Assignment of insurance
- Cost overrun guarantee
- Postponement of all shareholder loans
- Environmental indemnity of the borrower
Construction loan is typically advanced in stages (referred to as draws) depending on the progress of construction. In other words, a certain portion of the loan is only advanced after the completion of each construction stage. For example, the first draw may occur once the foundation is completed and validated by the lender; subsequent draw will then occur once the framing is in place; this will continue until the project is complete. This helps ensure that progress is made throughout the loan term according to the borrower’s business plan.
In some cases when a lump sum is required to complete an ongoing construction project, we can provide the loan in one advance. However, this is done on a case by case basis based on project status, loan amount, and project loan metrics.
There are several ways to improve your loan application.
- Offer additional collateral properties: A lender can register mortgage security and charge on additional collateral properties in support of the loan. The collateral properties must have sufficient equity and any outstanding loan must be in good standing.
- Present strong registration / presales: Pre-selling your project before construction will help demonstrate to lenders that there is demand for your finished product at the given price point. Depending on the nature of the loan, you may be able to hold back on the sale of some units to capitalize on any price appreciation in the market.
- Have a strong project team: A project team includes the borrower(s), covenantor(s), and builders. The borrower and covenantor should demonstrate strong net worth to cover any cost overrun. The builders should also be experienced in the product type being considered for the project.
A blanket mortgage is a mortgage on more than one property. The mortgage covers several properties and individual properties can be sold without the need to service the blanket mortgage (depending on its terms). The advantages associated with a blanket mortgage include being able to save on fees which would be associated with having seperate mortgages and only needing to negotiate one interest rate. The disadvantage is that default on a blanket mortgage can lead to the lender taking possession of all the properties since they are being used as collateral.
Blanket mortgages are commonly used by real estate developers when buying a large piece of land for development and dividing it into smaller lots which can then be sold individually. This is commonly referred to as a land severance.
To start your mortgage application, we will require basic details of the project to ensure it meets our risk parameters and is consistent with our investment policy. In order to perform this analysis we will need information such as: the loan purpose, loan amount, loan term, location, purchase and sales agreement (if applicable), project construction/renovation budget (if applicable), appraisal (if available) and personal net worth statement (if available).
Providing comprehensive information at this stage will better assist us in making a competitive offer.
In addition to the starting list, articles of incorporation, tax documents, project and construction team, site plan approval, permits, insurance, environmental and geotechnical reports (if applicable), tarion documentation, project monitor report (if applicable), architectural drawing, etc.
The borrower is the party borrowing the funds, who is responsible for repayment of the loan. The borrower can be a person, corporation, or partnership.
The covenantor is akin to a guarantor in a standard mortgage and is responsible for payment of the loan if the original borrower defaults.
No. Private lenders usually provide only short term financing and mortgages are interest only.
4.0% to 10.0%+ interest rate depending on the parameters of your project.
In order to obtain a lower interest rate, private lenders can syndicate with larger institutions such as banks and institutional lenders. In order to syndicate, the loan amount must be sufficiently large and falls within specific risk parameters, and the covenanters must be able to demonstrate sufficient net worth and experience. Note that the syndication process with banks and institutional lenders can be a lengthy process (~two months turnaround).
The interest rate is variable according to bank prime rate.
Loans can range from 6 months to 36 months.
Assuming that the project has proceeded according to the business plan, the borrower will have either sold or refinanced the mortgaged property to repay the loan. If the borrower requires more time, he/she can request a loan extension (subject to lender’s discretion) or seek another lender for a bridge loan.
Yes. You can request an extension option and the decision to grant one will be considered on a case by case basis. Extension options are usually available for larger developments that may take longer to complete due to their size and complexity.
Defaulting on a loan is when the borrower deviates from the business plan or fails to follow the business plan. For a purchase / refinance loan, this may be the borrower’s inability to service the monthly interest payments. For a construction loan, this may refer to making undisclosed changes to the property or construction plan or using the loan for other uses without lender’s approval.
In the event of default, the lender will undertake actions to remedy the situation. If the default cannot be resolved, the lender will take over and sell the property to repay the outstanding loan. After the loan is settled, additional proceeds will go to the borrower.
Still have questions?
Mortgage loans for your project do not need to be complicated. Our staff is seasoned at managing both small and large requests and are here to answer any questions you may have.
