Private Mortgages in Canada Explained

When a traditional lender turns down a mortgage application, some Canadians turn to private lending as an alternative path to financing. Private mortgages can be a useful short-term tool in the right circumstances, but they operate very differently from bank or credit union lending and carry distinct risks worth understanding before signing anything.

What a Private Mortgage Actually Is

A private mortgage is financing arranged through an individual investor, a group of investors, or a private lending company rather than a bank, credit union, or monoline lender. These lenders are typically less concerned with the strict income and credit requirements used by traditional institutions, and more focused on the value of the property and the equity available in it.

Because private lenders take on more risk by lending to borrowers who don't fit conventional criteria, they generally charge higher interest rates and fees compared to institutional lenders. Terms are also usually much shorter, often ranging from six months to a few years, rather than the typical five-year term seen with traditional mortgages.

Private mortgages are registered on title just like conventional mortgages, and can be arranged as a first, second, or even third mortgage depending on how much equity is already in the home.

When a Private Mortgage May Make Sense

Private financing tends to come into play in specific situations rather than as a first choice. Self-employed borrowers with complex or hard-to-document income, individuals who have gone through a bankruptcy or consumer proposal, or those who need funds quickly for a time-sensitive purchase may find private lending fills a gap that traditional lenders cannot.

It can also be used as a bridge solution. For example, a homeowner selling one property and buying another might use a short-term private mortgage to cover a gap in timing, with the plan to pay it off once the sale closes or once they qualify for traditional refinancing. Someone rebuilding credit after a financial setback might also use a private mortgage temporarily while working to qualify for a conventional mortgage down the road.

In these cases, the private mortgage is generally treated as a stepping stone rather than a long-term solution, which is an important distinction to keep in mind when weighing whether it's the right fit.

The Costs and Risks to Watch For

The trade-off for flexibility is cost. Private mortgage interest rates in Canada can be significantly higher than rates offered by banks, and lenders often charge additional fees such as lender fees, broker fees, and legal fees, which can add up to a meaningful percentage of the loan amount. To illustrate, a private mortgage might carry a lender fee of 2 percent of the loan value on top of a higher interest rate, though actual costs vary widely depending on the lender, the property, and the borrower's situation.

Short terms mean borrowers need a clear exit strategy before the mortgage matures. If a borrower cannot refinance with a conventional lender or sell the property by the end of the term, they may face renewal with the same private lender at a similar or higher cost, or risk default. Some private mortgages also include interest-only payments, which keep monthly costs lower but mean the full principal is still owed at the end of the term.

It is also worth understanding that not all private lenders operate the same way. Some are individual investors working through a mortgage broker, while others are organized mortgage investment corporations (MICs) regulated under provincial securities and lending rules. Reading the mortgage commitment carefully, including any prepayment penalties or renewal conditions, is essential before signing.

How to Approach a Private Mortgage Decision

Anyone considering a private mortgage should have a realistic plan for how they will exit it, whether that means improving credit to qualify for conventional financing, selling the property, or paying it off through other means. Because these mortgages are usually short-term and higher cost, they work best as part of a defined strategy rather than an open-ended arrangement.

Working with a licensed mortgage broker can help borrowers understand whether a private mortgage is genuinely necessary or whether other options, such as a B-lender or alternative institutional lender, might be available at a lower cost. A broker can also help compare terms across different private lenders, since fees and conditions can vary considerably from one to another, and can help structure the mortgage with a clear path back to conventional financing.

Key Takeaways

• Private mortgages are typically used when borrowers don't meet conventional lending criteria due to income documentation, credit history, or timing needs
• Interest rates and fees are generally higher than traditional mortgages, and terms are usually much shorter
• A clear exit strategy is essential since most private mortgages are meant as short-term solutions
• Not all private lenders operate the same way, so reviewing terms, fees, and renewal conditions carefully matters
• A mortgage broker can help determine whether a private mortgage is necessary or if lower-cost alternatives exist

Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or mortgage advice. Any numbers, rates, or scenarios mentioned are examples only and may not reflect current market conditions. Always consult a licensed mortgage professional or financial advisor for guidance specific to your situation.