Aaron Bell
Athena Cocoves
Private home loan lenders are non-bank institutions or individuals providing a mortgage outside the traditional banking system.
These types of mortgage lenders may offer more flexible and personalised lending criteria. So, they are often suited to individuals with unique financial situations who cannot get pre-approval for a mortgage from a traditional lender.
» MORE: What is a non-bank lender?
How do private home loan lenders work?
Private home loan lenders derive their business from gaps in the home loan market that mainstream lenders do not cover. However, these niche loans may come with higher interest rates and fees as they often deal with borrowers who do not qualify for loans with banks due to their risk.
As with other forms of credit, you submit an application to the private lender that then assesses your situation based on:
- income
- expenses
- credit history
- the property you want to buy
- assets and investments.
A private lender may charge you a higher interest rate based on the above factors. They may also charge high fees, so it’s vital that you understand what these are before agreeing to a loan.
» MORE: 9 tips for getting a mortgage when self-employed
Types of mortgages they offer
Bridging loans
A bridging loan is a short-term loan that allows you to buy a property to live in before you have sold your existing property. The time period for bridging loans in Australia is usually six months maximum.
Bad credit loans
As the name suggests, these loans are for borrowers with a poor credit history. Many banks will reject borrowers with a history of defaulting or missing repayments. Private lenders may offer these loans with an interest rate that reflects the risk.
Second mortgages
A second mortgage is not for buying a second property. A second mortgage is when you borrow money a second time using the same property as security on the loan. It can free up cash in the short term by helping you access equity, but it usually means paying more in mortgage repayments and interest in total.
» MORE: Types of home loans in Australia
Pros and cons of private home loan lenders
Pros
- Flexible lending criteria. The main advantage of a private lender is flexible lending criteria. Many offer lenient credit history criteria or accept low documentation. If you have a bad credit history following you around, making it difficult to get a home loan, you may need a private lender to buy a property.
- Personalised loans. Private lenders help you in a unique situation. For example, a private lender may be a quick fix if settlement goes through quicker than expected and you need a bridging loan to cover you while you sell your old home.
- Quick processing. Private lenders may process your application faster than a bank, meaning the money is in your account sooner.
Cons
- Higher interest rates. If you have a poor credit rating, a private lender may charge a higher interest rate to compensate for the risk of lending you money.
- Higher fees. Much like the interest rate, a private lender may also charge exorbitant fees to borrowers with no other option for getting a home loan.
- It can be challenging to repay short-term loans. Short-term loans — for example, bridging loans — need to be paid off in a short time. If you have previously struggled to manage credit, taking out a large bridging loan with a short repayment schedule may lead to financial stress.
» MORE: Should you buy or rent?
Other options to explore
If you want to buy a house and are struggling to get approval from a bank, it’s helpful to understand your alternatives before opting for a private lender.
See if you qualify for government schemes
To address housing affordability, federal and state governments offer a variety of grants and schemes to help Aussies get a foot in the market. Depending on your circumstances, you may qualify for the First Home Guarantee Scheme, Family Home Guarantee (FHG), Regional First Home Buyer Support Scheme (RFHBG) or others.
Getting this assistance may boost your buying capacity or ability to secure a lower interest rate loan from a bank.
Go in with family or friends
If you are unable to secure financing for a traditional mortgage, an option is to get help from a relative or friend as a guarantor. You could also consider buying a house with friends to split costs.
Save for a larger deposit
Another way to avoid a private lender mortgage is to wait and focus on saving a bigger deposit. Showing a lender your genuine savings and asking for less money to borrow should greatly increase your chances of obtaining a loan.
» MORE: How to save for a house deposit
Get a better credit rating
Borrowers considering a private lender home loan may have bad credit histories. The good news is your credit score can change, helping you secure a better interest rate on a mortgage in the future. To improve your credit score, you can:
- Pay off existing debts, such as car and personal loans
- Adjust your credit card limit
- Pay bills on time and avoid late fees
- Minimise the number of credit enquiries on your report.
About the Author
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