Private Lending in Alberta: A Guide for Both Borrowers and Lenders

When traditional banks say "no," or when you're seeking a different kind of investment, private lending often steps in. Also known as a private mortgage, this involves an individual or private company lending money, using real estate as security. For borrowers, it's a crucial source of capital. For lenders, it's a way to generate attractive returns. However, the speed and flexibility come with significant risks that require careful legal management.

What is Private Lending?

Private lending is a loan secured by a mortgage on a property, where the lender is not a traditional bank or credit union. It's a contractual agreement between private parties, often used for:

• Bridge Financing: Covering costs between buying a new property and selling an old one.

• Renovation Projects: Financing that a bank may be hesitant to fund.

• Credit Issues: Helping borrowers who don't meet strict bank criteria.

• Investment Opportunities: Providing capital for real estate flips or development.

  
  

A Guide for the Private Lender

For individuals with capital to invest, private lending can offer higher returns than many traditional investments.

Potential Benefits for Lenders:

• Attractive Returns: Interest rates on private mortgages are typically higher than conventional ones.

• Secured Investment: The loan is secured by a registered mortgage against the borrower's property, giving you a legal claim to the asset if the loan isn't repaid.

• Portfolio Diversification: It adds a real estate-backed asset to your investment portfolio.

  
  

Key Risks & Protections for Lenders:

• Borrower Default: The primary risk is that the borrower fails to make payments. Your recourse is to enforce your security through a power of sale or foreclosure process, which can be time-consuming and costly.

• Insufficient Security: If the property's value drops or was overvalued, selling it may not recover the full loan amount. A conservative loan-to-value (LTV) ratio is your first line of defense.

• Legal Documentation: A poorly drafted mortgage and loan agreement can leave you exposed. Key safeguards include:

• A professionally prepared Loan Agreement and Mortgage.

• Conducting thorough due diligence on the property's title and value.

• Ensuring valid fire and property insurance is in place with you listed as mortgagee.

  
  

A Guide for the Borrower

For borrowers, private lending provides access to funds that might otherwise be unavailable.

Potential Benefits for Borrowers:

• Access to Capital: It can be a viable solution when you need financing quickly or have been turned down by a bank.

• Speed and Flexibility: Private loans can often be arranged much faster than conventional mortgages, with more negotiable terms.

• Short-Term Solution: It's ideal for bridging a temporary financial gap.

Key Risks & Considerations for Borrowers:

• Higher Costs: Expect higher interest rates and lender fees than with a traditional bank loan.

• Short Term: Private mortgages are usually short-term (6 months to 3 years). You must have a clear exit strategy for repaying the loan in full by the maturity date (e.g., selling the property, refinancing with a bank).

• Strict Terms: Default clauses can be severe. A single missed payment could allow the lender to demand immediate full repayment or begin legal proceedings.

• Legal Advice: It is critical to have a lawyer review the loan agreement to ensure you understand all your obligations and the potential consequences of default.

  
  

The Critical Role of Legal Counsel

For both parties, a private mortgage is a significant legal and financial commitment. Jade Sunrise Law provides essential services to protect your interests:

• For Lenders: We draft robust loan and mortgage documents, conduct title searches, register the mortgage, and advise on enforcement procedures.

• For Borrowers: We review and explain the loan terms, ensure you are aware of all risks, handle the closing, and ensure the lender's security is properly discharged once the loan is repaid.

  
  

Secure Your Private Lending Transaction

Private lending can be a powerful tool, but its success depends on professional legal documentation and a clear understanding of the risks involved by all parties.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Private lending involves significant financial risk. All parties should consult with qualified legal and financial professionals before entering into a private lending agreement.

Whether you are a lender seeking to protect your investment or a borrower considering a private mortgage, the experienced team at Jade Sunrise Law can guide you through the process. Contact us today to ensure your transaction is legally sound and secure.