You may have a bad credit history because you defaulted on any debt repayment or delayed multiple bill payments. This may then mean you’re unable to procure a mortgage from traditional institutions, and private home loan lenders could be an alternative option for you. Private home loans are available from individuals or businesses that have access to a pool of private funds. Generally, they are available as short-term finance, and there are four different loan types.
The four types of private home loans
If you’ve purchased a new home but not yet sold your previous property you may need a bridging loan to help tide you over. Bridging loans are a short-term loan that covers your finances during this time. Generally, these are interest-only loans often at a higher rate, which are repaid from the proceeds of the sale of your existing home. The risks you take with these loans are if there is a delay in the sale of your property or a lower than expected sale price that is less than the loan amount, which results in a shortfall.
Bad credit loans
If you’ve previously defaulted on loan repayments or delayed payment of bills, it will result in a bad credit history. Bad credit history can make it tough to get access to a home loan from standard lenders. Private home loan lenders for bad credit can be used as a short-term measure whilst you improve your credit history. This will then allow you to possibly refinance and qualify for a regular mortgage.
Caveat loans are available against the equity in your property. They can help you get funds to fulfil urgent financial obligations. These are short-term facilities available for two or three months and usually carry a higher interest rate. Private home loan lenders in Australia determine the repayment schedule, including the principal and interest repayment based on the equity you have in your property at the time of approval.
A second mortgage allows you to access an additional home loan on your existing property that has a current outstanding loan. When it comes to repayment, the first mortgage takes precedence over the second mortgage. This also means if you default, the first loan will be recovered before the second mortgage. As the risk for a second mortgage is high, the interest rate is also more than you’d have on a regular home loan. You’ll also need permission from your current lender to use your property as security for the second mortgage with the home equity loan private lender.
Pros and cons of private home loans
Private home loans may be a good option if you need finance for the short-term or you have a bad credit history. The benefits of private home loans include a quick and easy approval process with limited documentation requirements. They also offer you specialised loans that are not offered by traditional financial institutions.
On the other hand, private lenders for bad credit home loans or other types of home loans charge a higher rate of interest. These home loans are also only available for the short-term, generally between three months and a year and don’t offer features like offset accounts and redraw facilities.
Making your decision
A key consideration when looking at private lenders is that they can approve your loan application quickly. If you’re self-employed, have a bad credit history or are unable to provide proof of income, private lenders can offer you a loan when other lenders won’t. Overall, the entire process is straightforward and quick, which is helpful if you need the funds urgently.
To decide whether a private home loan is a good option for you, you should do your research and compare various available options. During this research, you should not only consider the interest rate but also look at any fees, such as higher upfront charges. These fees and charges may not be refunded if your application isn’t approved. Seeking advice from an experienced financial planner may help you make an informed decision.