Private mortgages are often misunderstood. While they're associated with credit problems, many borrowers use private lending for strategic reasons. This guide explains when private mortgages make sense and how to use them wisely.
What Is Private Lending?
Private mortgages are loans from individuals or investment companies rather than banks or credit unions.
How Private Lending Differs
| Factor | Traditional Lender | Private Lender |
|---|---|---|
| Qualification | Income, credit, ratios | Primarily equity |
| Interest rate | 4-6% | 7-15%+ |
| Approval speed | Days to weeks | Often same day |
| Maximum LTV | 80-95% | 65-75% typically |
| Term length | 1-10 years | 6-24 months typically |
| Purpose | Long-term ownership | Short-term solution |
When Private Mortgages Make Sense
Scenario 1: Credit Issues
Situation: Recent bankruptcy, consumer proposal, or credit event
Why private works:
- Approve based on equity, not credit score
- Provides time to rebuild credit
- Exit to traditional lender in 1-2 years
Scenario 2: Self-Employment Income
Situation: New business or low declared income on tax returns
Why private works:
- Doesn't require 2 years of T1 Generals
- Focuses on equity and ability to pay
- Bridge until income documentation improves
Scenario 3: Time-Sensitive Purchase
Situation: Need to close quickly (estate sale, builder deadline)
Why private works:
- Can fund in days, not weeks
- Fewer conditions and bureaucracy
- Secure property now, refinance later
Scenario 4: Bridge to Bank Approval
Situation: Need 6-12 months to meet bank criteria
Why private works:
- Provides interim financing
- Clear path to traditional mortgage
- Prevents losing property opportunity
Explore Your Options
Contact our team to determine if private lending is right for your situation—and develop an exit strategy.
Private Mortgage Costs
Interest Rates
| Situation | Typical Rate Range |
|---|---|
| First mortgage, strong equity | 7-9% |
| First mortgage, marginal equity | 9-12% |
| Second mortgage | 10-15%+ |
| Complex situations | 12-18%+ |
Additional Fees
| Fee Type | Amount | Notes |
|---|---|---|
| Lender fee | 1-3% of mortgage | Paid at closing |
| Broker fee | 0-2% | May be additional |
| Legal fees | $1,500-$3,000 | Both sides |
| Appraisal | $400-$600 | Usually required |
True Cost Example
$200,000 private mortgage for 1 year:
| Cost Component | Amount |
|---|---|
| Interest (10% annually) | $20,000 |
| Lender fee (2%) | $4,000 |
| Legal fees | $2,500 |
| Appraisal | $500 |
| Total cost | $27,000 |
Effective cost: 13.5% when fees are included.
Private Mortgage Requirements
What Lenders Focus On
| Factor | Importance | Typical Requirement |
|---|---|---|
| Equity/LTV | Critical | 65-75% max LTV |
| Property type | High | Prefer residential |
| Location | High | Urban/suburban preferred |
| Exit strategy | Critical | Clear plan to refinance |
| Ability to make payments | Moderate | Proof of income helpful |
| Credit score | Low | May not even pull credit |
Property Considerations
| Property Type | Private Lender Interest |
|---|---|
| Urban house | High—easy to value/sell |
| Urban condo | Moderate—depends on building |
| Suburban house | Moderate to high |
| Rural property | Lower—harder to value/sell |
| Vacant land | Low—specialty lenders only |
| Commercial | Specialty lenders |
The Exit Strategy: Critical Component
Why Exit Strategy Matters
Private mortgages are short-term solutions. Without a clear exit, you risk:
- Paying high interest indefinitely
- Power of sale if you can't refinance
- Renewal at even higher rates
Common Exit Strategies
| Strategy | Timeline | Requirements |
|---|---|---|
| Rebuild credit | 12-24 months | Payment history, time |
| Establish income docs | 12-24 months | 2 years of tax returns |
| Property sale | Varies | Market conditions |
| Equity increase | Depends | Appreciation or paydown |
| Partner buyout | Varies | Settlement agreement |
First vs. Second Mortgages
First Mortgage (Private)
- Replaces or is your only mortgage
- Lower rates than second mortgages
- First claim on property
- Maximum LTV around 75%
Second Mortgage (Private)
- Sits behind existing first mortgage
- Higher rates due to higher risk
- Combined LTV usually max 80%
- Smaller loan amounts typically
When Each Makes Sense
| Scenario | First or Second |
|---|---|
| First-time purchase with credit issues | First |
| Accessing equity, keeping existing mortgage | Second |
| Breaking bank mortgage too expensive | Second |
| Need maximum funds | First (higher LTV) |
Red Flags to Avoid
Warning Signs of Predatory Lending
| Red Flag | What It Means |
|---|---|
| Upfront fees before approval | Scam risk |
| No clear fee disclosure | Hidden costs |
| Pressure to decide immediately | Rushed decision |
| Unrealistic promises | Too good to be true |
| No license/registration | Unregulated |
| Balloon payments you can't afford | Set up to fail |
Protecting Yourself
- Work with licensed mortgage brokers
- Get everything in writing
- Use a real estate lawyer
- Understand all fees before committing
- Have realistic exit strategy
FAQ
Q: Is private lending legal in Canada?
A: Yes, completely legal. Private lending is a legitimate part of the mortgage market.
Q: How fast can private mortgages fund?
A: Often 3-7 days. Some can fund in 24-48 hours for urgent situations.
Q: Can I get a private mortgage on a rental property?
A: Yes—private lenders finance rentals, often more easily than primary residences.
Q: What happens if I can't refinance at the end of the term?
A: You may need to renew at potentially higher rates, find a new lender, or sell the property.
Q: Do private mortgages report to credit bureaus?
A: Most do not, which means they won't help rebuild credit directly.
What's Next
Private mortgages can be valuable tools when used strategically. Connect with our team to explore whether private lending fits your situation—and develop a solid exit plan.
Ready to Get Started?
Contact us today for personalized mortgage advice and competitive rates.
