Private Mortgage FAQs: Definitions and Basics in Canada

A private mortgage is a powerful financial tool that offers an alternative to traditional bank lending. As an award-winning mortgage brokerage with over 2,000 five-star reviews since 2015, 360Lending has created this comprehensive three-part FAQ to guide you.

This first section breaks down the Definitions and Basics of private mortgages. Once you have a foundational understanding, you can explore our other guides on Requirements & Lenders and Costs, Uses & Risks to continue your journey.

What Is a Private Mortgage?

A private mortgage is a loan provided by an individual, a group of investors, or a private company, rather than a large financial institution like a bank or credit union. These mortgages are typically used for a short period and are arranged to help borrowers who do not qualify for a traditional bank mortgage.

Because private mortgages are not subject to the same strict lending criteria as banks, they offer much greater flexibility. They are often a solution for borrowers with a bruised credit score, unconventional income, or unique property types.

How Does a Private Mortgage Work?

A private mortgage works by providing a lump sum of money to a borrower in exchange for a legal agreement to repay the loan over a set term. The loan is secured by the property, meaning the lender can seize the home if the borrower defaults.

Unlike a bank, a private lender's decision is based primarily on the value of the home and the equity in the property, not on the borrower’s income or credit score. This approach is called "asset-based lending" and is the key to how private mortgages can help borrowers who don't fit the traditional mold.

What's the Difference Between a Private Mortgage and a Bank Mortgage?

The main difference is the lender. A bank mortgage is provided by a large financial institution with very strict lending rules. A private mortgage is provided by a non-institutional lender who has more flexible qualifying criteria.

Because of this flexibility, private mortgages typically come with higher interest rates and shorter terms (1 to 3 years) compared to bank mortgages. Banks focus on the borrower's credit and income, while private lenders focus on the home's value and the borrower's equity.

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What's the Difference Between a Private Mortgage and a Second Mortgage?

A private mortgage describes the type of lender, while a second mortgage describes the position of the loan on the property's title.

You can have a private mortgage that is a second mortgage. For example, if you have a primary mortgage with a bank, a private lender can give you a "private second mortgage" to access additional funds. The terms are not mutually exclusive; they describe different aspects of the same loan.

How Is a Private Mortgage Different from a Private Loan?

A private mortgage is a secured loan, as it is backed by the equity in your home. A private loan is generally an unsecured loan provided by a private lender, with no collateral.

Because a private loan is unsecured, it carries a much higher risk for the lender. As a result, private loans often have significantly higher interest rates than private mortgages, as there is no asset to fall back on if the borrower defaults.

What Is a Private Mortgage vs. a Syndicated Mortgage?

A private mortgage is a loan from a single individual or company. A syndicated mortgage is a loan from a group of private investors who pool their money together to fund the mortgage.

The key difference is the number of investors. In a syndicated mortgage, you are borrowing from a collective of investors, whereas a private mortgage involves a single source of funds. From the borrower's perspective, both function as asset-based mortgages.

Who Are Private Mortgage Lenders?

Private mortgage lenders are typically high-net-worth individuals, investment companies, or mortgage investment corporations (MICs). They are not traditional banks or credit unions.

They use their own capital to fund loans and are not subject to the same regulations as traditional financial institutions. This allows them to make faster lending decisions and offer more flexible terms.

How to Find a Private Mortgage Lender?

The best way to find a reputable private mortgage lender is to work with a mortgage broker who specializes in private lending. These brokers have a network of private lenders and can match you with the right one for your specific situation.

Private lenders do not typically advertise their services to the public. Instead, they rely on a network of brokers to find qualified borrowers, making a broker the most efficient and safest way to secure a private mortgage.

How to Compare Private Mortgage Offers?

To compare private mortgage offers, you should look beyond just the interest rate. Key factors to compare include the lender's fees, the loan term, the lender's reputation, and any prepayment penalties.

It's also important to have a clear exit strategy to pay off the private mortgage before the term ends. Comparing offers from multiple brokers will give you the best chance of finding a competitive rate with favorable terms.

Are Private Mortgages Regulated in Canada?

Yes, private mortgages are regulated in Canada, but the regulations can vary by province. Mortgage brokers and lenders must be licensed and follow provincial rules and guidelines.

While private lending is more flexible than bank lending, it is not completely unregulated. Working with a licensed and reputable mortgage broker ensures that you are protected and that the lender is operating within legal boundaries.

Is a Private Mortgage the Same as a Subprime Mortgage?

A private mortgage is not necessarily the same as a subprime mortgage, but they are often used in similar situations. The term "subprime" describes a borrower's credit history, while "private" describes the type of lender.

A subprime mortgage is a loan given to a borrower with a less-than-perfect credit score. While many private lenders provide these loans, a private lender can also provide a mortgage to a prime borrower who doesn't meet a bank's income or property requirements.

What Is a Private Mortgage Investment Corporation (MIC)?

A Mortgage Investment Corporation (MIC) is a company that pools money from investors to lend out as mortgages. MICs are a common type of private mortgage lender.

MICs are an efficient way for investors to participate in the mortgage market and for borrowers to access capital. They are a popular source for private financing, especially for second mortgages and loans with non-traditional lending criteria.

Private Mortgage Definitions and Basics in Canada

This guide has provided a foundational understanding of private mortgages. To learn more about how to qualify and apply, explore our guide on Private Mortgage Requirements & Lenders and for a breakdown of costs, uses, and risks, visit our guide on Private Mortgage Costs, Uses & Risks.

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