When traditional banks decline your mortgage application, private mortgages can provide a path to homeownership—but they're not for everyone. Understanding how private lenders and alternative lenders operate helps you make informed decisions about this financing option.
What Is a Private Mortgage?
A private mortgage is a loan from an individual investor or private lending company rather than a bank or credit union. These alternative lenders typically:
- Have more flexible qualification criteria
- Make lending decisions based primarily on property value and equity
- Charge higher interest rates (typically 8-15%+)
- Offer shorter terms (usually 1-2 years)
Key Distinction: Private mortgages are designed as short-term solutions, not permanent financing. The goal is to bridge a gap until you qualify for traditional lending.
When Private Lending Makes Sense
1. Credit Challenges
If your credit score is below 600 or you have recent credit issues (bankruptcy, consumer proposal, collections), private lenders may be your only option while you rebuild.
2. Self-Employment Income Verification
Business owners who can't document income traditionally may qualify with alternative lenders based on business bank statements or net worth.
3. Time-Sensitive Purchases
When you need to close quickly—perhaps to prevent foreclosure or secure an investment property—private lenders can fund within days rather than weeks.
4. Unique Properties
Homes that don't meet bank criteria (rural properties, non-standard construction, mixed-use buildings) often require private mortgages.
The True Cost of Private Mortgages
Private mortgage costs extend beyond the interest rate:
| Cost Component | Typical Range |
|---|---|
| Interest Rate | 8% - 15%+ |
| Lender Fee | 1% - 3% of loan |
| Broker Fee | 1% - 2% of loan |
| Legal Fees | $1,000 - $2,500 |
| Appraisal | $300 - $500 |
Example: On a $300,000 private mortgage at 10% interest with 2% lender fee and 1.5% broker fee:
- Annual interest: $30,000
- Lender fee: $6,000
- Broker fee: $4,500
- Total first-year cost: $40,500+
This is why private mortgages should only be used when the benefits outweigh these substantial costs.
Exit Strategy: The Critical Factor
No reputable mortgage broker will recommend a private mortgage without a clear exit strategy. Before proceeding, you need a realistic plan to:
- Improve credit sufficiently to qualify with B-lenders or banks
- Document income properly (for self-employed borrowers)
- Sell the property if other options fail
Warning: Renewing with private lenders year after year creates a debt trap.
Private Mortgage vs. B-Lender: Know the Difference
B-Lenders (like Equitable Bank, Home Trust) sit between traditional banks and private lenders:
| Factor | B-Lender | Private Lender |
|---|---|---|
| Rates | 5% - 8% | 8% - 15%+ |
| Terms | 1-5 years | 6 months - 2 years |
| Credit Min | ~500-550 | No minimum |
| Income Verification | Required | Flexible |
If you qualify for B-lending, it's almost always preferable to private mortgages.
The Bottom Line
Private mortgages and alternative lenders serve an important role in Canada's mortgage ecosystem—they provide options when traditional paths are closed. But they're expensive and should only be used strategically with a clear exit plan.
Wondering if you qualify for traditional or B-lender financing? Apply for a free assessment and explore all your options before considering private lending.
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