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Private mortgages: borrowers beware

Borrowers need to know what they’re getting into before signing up for a private mortgage because it could be more costly than they anticipate, warns Mississauga real estate and immigration lawyer Jia Junaid.

“The number one thing people need to know about private mortgages is that they come with a host of strings attached and a hefty price,” says Junaid, principal of Atlas Law. "This is the Wild West of the real estate industry as the players are often individuals or small holding corporations providing mortgages to borrowers who find themselves hanging by a thread financially."

She tells AdvocateDaily.com that private mortgages are often the last option for people who are refused by traditional lenders, and differ dramatically from the institutional mortgages you might get from A and B lenders. 

In a private mortgage situation, a borrower must pay all the related fees, including disbursements, title insurance and legal fees, which is standard in any real estate transaction, Junaid says.

"What's different about private mortgages is that if the mortgage amount is more than $50,000, the borrower ends up paying for two sets of fees — their own as well as the lender's," she says.

“Many borrowers are under the mistaken assumption that if the mortgage amount is $50,000 or less — and since the same lawyer may have met with both the lender and the borrower — that there’s some kind of a duty for the lender’s lawyer to look after their interests. Absolutely not,” she says. “Borrowers must hire their own lawyer to ensure they’re protected when they opt for a private mortgage deal.” 
 
Junaid also points out that lenders will also usually deduct a 10 per cent lending fee off the total sum.
 
"For example, on a $50,000 mortgage, the lender will deduct 10 per cent and provide $45,000 to the lawyer," she says. "The lawyer will then deduct their legal fees and disbursements and advance the remaining amount to the borrower. However, the mortgage registered will be for $50,000, and at the end of the term, the entire $50,000 will be due even though the borrower has been making hefty interest payments over the course of the term."
 
What ultimately happens is that the monthly payments are allocated toward the interest, and the full principal, with all associated fees, is still payable at the end of the term, Junaid says.
 
"This is the devil you go to when there are no other options," she says. "This is an area where you can see very oppressive things so you want to be careful of potential fraud, which is rampant."
 
Much of the Law Society of Ontario's warnings are focussed on borrower fraud, but Junaid says she has represented borrowers in a number of litigation cases where the lender was the party accused of mortgage fraud.
 
"Lender fraud is a real concern in the private mortgage industry and one that needs to be recognized and addressed," she says. "Moreso in secured transactions because ultimately the lender enjoys security while the borrower is left with litigation if the lender is fraudulently inflating balance due numbers, hitting borrowers with undisclosed renewals fees and inflated legal fees, and even forging borrower signatures on unregistered amending agreements, which amend the terms of the original commitment unbeknownst to the borrower."
 
“As a borrower, you definitely want to know you’re going to be paying the whole sum back at the end of the term. You want to know that you’re going to be covering the legal fees, title insurance, and disbursements,” she says.

Junaid says she recently dealt with a case stemming from a $30,000 private loan that escalated to $60,000 after all the fees were attached — many of those costs weren't disclosed beforehand. And although her client knew she had a good case, taking it to court could have incurred another $50,000 so they chose to settle.

“Cases like that stick with you because you realize what happened wasn’t right,” she says.

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