Private Mortgages in Canada: How They Work, What They Cost, and How to Use One Safely

What a private mortgage is — and why people use one

A private mortgage is funded by private capital — an individual investor, a mortgage investment corporation (MIC), a syndicate, or a private fund — rather than a deposit-taking bank. Terms are short (usually 6 to 12 months), often interest-only, and priced above bank rates because the lender is taking on files banks won't.

The common causes are practical, not exotic: a credit score knocked down by a divorce or a business rough patch; self-employed income that is real but hard to paper; CRA arrears that must be cleared before any bank will refinance; a purchase that has to close in days; a renovation or construction phase; a bridge between a purchase and a sale; or consolidating expensive revolving debt while credit heals. Used deliberately, a private mortgage buys time and access. Used passively, it just buys interest.

How qualification really works: appraisal first, everything else second

Banks underwrite the borrower; private lenders underwrite the property. The appraisal is the centre of the file — a current, full appraisal from an approved appraiser sets the value, and the lender advances a percentage of it (the loan-to-value, or LTV). Most private lending stops at 65–80% LTV including every mortgage already on title.

Credit and affordability still matter, just differently. Your credit report explains the story and prices the risk rather than gating approval; the lender wants to see the payment is survivable and that property taxes and any first mortgage are current. Expect to show ID, title, existing mortgage statements, tax status and insurance — days of paperwork, not the weeks a bank takes.

Who regulates all this

Mortgage brokering is provincially licensed — FSRA in Ontario, BCFSA in British Columbia, RECA in Alberta, and equivalents in every province — and licensed brokers owe you written disclosure of costs, conflicts and suitability. Many private lenders themselves are not regulated the way banks are: OSFI's rules bind federally regulated institutions, not an individual lending their own capital. That gap is why the disclosure documents, an independent appraisal, and — for many transactions — independent legal advice are your protection. If a deal only works when you skip reading something, it doesn't work.

Where private mortgages genuinely help

They rescue closings that would otherwise collapse, clear CRA and consumer proposals so prime refinancing becomes possible, fund renovations that raise the property's value, bridge purchase-sale gaps, and let self-employed borrowers buy while building the two-year income record banks want. A well-structured second mortgage can also be cheaper than breaking a low-rate first mortgage: you keep the first intact and borrow only the top-up privately.

Where they become a problem

The failure pattern is always the same: no exit. Interest-only payments at private pricing are manageable for a year and corrosive for five. Renewal fees repeat annually. If value falls or credit doesn't recover, the refinance out gets harder while the balance doesn't shrink. Power-of-sale is the endgame no one plans for — and it is far more common in files that never had a written exit than in files that did.

Exit strategies — decide yours before you sign

Every private mortgage should close with the exit already named: refinance to a bank or B-lender at a set milestone (credit score rebuilt, taxes filed, consumer proposal done, renovation complete); sale of the property with a realistic timeline; or a single planned renewal while a longer exit completes. Ask the broker to show the exit in writing with dates. If nobody can articulate how you leave, don't enter.

The fee structure, in plain numbers

A private mortgage has three costs: the rate (interest, usually interest-only), the lender fee (commonly 1–4% of the advance) and the broker fee (disclosed in writing; on private files the borrower usually pays it because the lender doesn't). Add legals and the appraisal. Fees come off the advance — borrow $100,000 at a 2% lender fee and 1% broker fee and roughly $97,000 lands. On a one-year term those points matter as much as the rate, so compare lenders on the total 12-month cost in dollars, never the rate alone.

How lenders manage criteria

Each private lender publishes a box: maximum LTV by position and location, urban versus rural appetite, property types they'll touch, minimum and maximum loan sizes, and whether they offer second position or a HELOC. Pricing moves inside the box — a 65% LTV first in a city prices far tighter than an 80% second in a small town. This is why shopping several lenders matters: the same file can price a full point apart across desks.

The types of private lenders

Individuals lend their own money, often through their broker — flexible, but capacity is limited and consistency varies. MICs (mortgage investment corporations) pool investors under a defined mandate — the workhorses of Canadian private lending, with published criteria and renewal desks. Syndicates group investors on a single larger mortgage. Private funds and alternative lenders — including credit-union adjacent programs and funds like Lendmax Capital — run institutional underwriting at private-lending speed, and are typically where HELOC-style products and larger loans live.

Predatory lending: what to look out for

Walk away from: fees demanded up front before any commitment (a small application or appraisal cost is normal; thousands "to secure the funds" is not); renewal fees designed to trap; blank spaces in documents; pressure to skip independent legal advice; loans knowingly written past what the property can refinance out of; and any lender who discourages you from involving a licensed broker. Insist on the written cost-of-borrowing disclosure, read the renewal clause, and have your own lawyer — not the lender's — explain the default terms.