Understanding Private Mortgages in Canada

When traditional financial institutions and alternative lenders are unable to provide financing, private mortgages serve as a vital, equity-based alternative in the Canadian real estate market. Private mortgages are funded by non-institutional lenders, ranging from individual high-net-worth investors and syndicated groups to organized Mortgage Investment Corporations (MICs). Unlike traditional banks that prioritize income tax records and credit scores, private lenders operate primarily on property equity, asset value, and real estate location.

How Private Lending Works

Private mortgage approvals center on the security of the property rather than traditional employment verification. Lenders evaluate the Loan-to-Value (LTV) ratio, which measures the requested loan amount against the appraised market value of the real estate. In major urban centers across Ontario and the Greater Toronto Area, private lenders typically cap their financing at 75% to 80% LTV to ensure a sufficient equity cushion remains to protect their capital investment.

Because private lenders take on higher individual risk, their loan terms are tailored differently from standard institutional mortgages. Most private mortgages are structured as short-term contracts, usually lasting six months to two years. Furthermore, payments are almost exclusively structured on an interest-only basis, meaning the borrower makes smaller monthly interest payments throughout the term without reducing the principal balance. The full principal loan amount remains due in a single lump sum when the term matures.

Costs, Rates, and Fees

The total cost of borrowing through a private mortgage includes both the contract interest rate and associated transactional fees. Interest rates reflect the increased risk and fast deployment of private funds, generally sitting higher than prime bank or B-lender rates. The exact rate depends on loan position (whether it is a primary first mortgage or a secondary charge behind an existing loan), property type, geographic location, and overall LTV ratio.

Beyond monthly interest, private transactions involve upfront arrangement fees. Borrowers typically encounter a lender fee, usually ranging between 1% and 3% of the total loan balance, which is deducted directly from the mortgage proceeds upon closing. In addition, borrowers are responsible for administrative closing costs, including independent legal representation for both parties, an accredited appraisal report, and title insurance fees.

When a Private Mortgage Makes Sense

Private mortgages are designed primarily as a short-term financial bridge or emergency funding solution rather than a permanent long-term strategy. Common scenarios where private financing proves essential include resolving urgent tax arrears with the CRA, halting power of sale or foreclosure proceedings, securing bridge financing during real estate transactions with misaligned closing dates, or providing capital for major property renovations and construction draws.

Private lending also provides critical access to capital for self-employed entrepreneurs, real estate investors executing value-add strategies, or individuals recovering from complex credit events who need immediate funding while restoring their financial profile.

The Importance of an Exit Strategy

Because private mortgages carry higher carrying costs and short maturity dates, establishing a clear exit strategy is a mandatory requirement before entering into any contract. A viable exit strategy outlines exactly how the full principal amount will be repaid at maturity, whether through refinancing back into a prime bank or B-lender, selling the property, or utilizing incoming business liquidity. Working alongside a licensed mortgage professional ensures that a private loan acts as an effective, temporary stepping stone toward long-term financial stability.