What is a Private Mortgage and How Do They Work?

You’ve found a fantastic real estate opportunity, or you're facing a pressing financial challenge, and you need funding. You go to your bank, the institution you've been loyal to for years, only to be met with a firm "no." For many Canadians, this can feel like a dead end.

But what if it wasn't? What if there was a whole other world of financing available, one designed specifically for situations that don't fit into the rigid boxes of traditional banks? Welcome to the world of private mortgages.

A "private mortgage" can sound intimidating or mysterious, but it's a legitimate and powerful tool used by thousands of homeowners and real estate investors across Ontario every day. This guide will demystify private lending. We'll explain what a private mortgage is, who the private lenders are, the specific situations where it's the perfect tool, and the critical role a mortgage broker plays in navigating this space safely and effectively.

What Exactly is a Private Mortgage?

A private mortgage is fundamentally different from a loan you get from a bank or a credit union.

It's Not a Bank Loan

The funds for a private mortgage do not come from a large financial institution. Instead, the money is provided by private sources. These sources are typically one of two types:

Individual Investors: Often wealthy individuals or family offices who invest their own capital directly into real estate mortgages to earn a competitive return.

Mortgage Investment Corporations (MICs): These are professionally managed corporations that pool the money of many individual investors together to fund a portfolio of mortgage loans.

In either case, you are borrowing from a private entity, not a public bank.

The Golden Rule: Equity-Based Lending

This is the single most important concept to understand about private lending. While banks focus primarily on your personal income and your credit score, private lenders focus almost exclusively on the value and equity in the property you are borrowing against. They are "asset-based" lenders.

This means that if you have significant equity in your home, a private lender will be far more interested in your deal than a bank would be, even if your income is hard to prove or your credit score is bruised. The strength of your property is the primary factor in their lending decision.

A Short-Term Bridge, Not a Forever Home

It's crucial to understand that private mortgages are not meant to be long-term, 25-year solutions. They are strategic, short-term loans, typically with a term of 6 to 24 months. They are designed to act as a "bridge" to get you from your current situation to a more stable, long-term mortgage with a prime lender. A private mortgage solves an immediate problem and gives you the time you need to fix the underlying issue.

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When is a Private Mortgage the Right Tool?

Private mortgages are designed for specific situations where speed, flexibility, and a common-sense approach are needed. Here are the most common scenarios where a private mortgage is the perfect solution.

For Real Estate Investors

This is a primary use case. For an investor doing a property flip (using the BRRRR method), a private mortgage is essential. It provides the fast funding needed to acquire a distressed property and the capital for renovations—a type of project a traditional bank would never finance.

For the Self-Employed

Many successful business owners have strong cash flow but, for tax purposes, declare a relatively low net income. Banks will reject their application based on this low "on-paper" income. A private lender can look past the tax returns and see the real strength of the business and the property, providing a loan based on the asset's value.

To Stop a Power of Sale

This is an emergency use case. If a homeowner has fallen behind on their mortgage payments and received a Power of Sale notice from their bank, a private mortgage can often be funded in under 10 days. This provides the cash needed to pay all the arrears and legal fees, immediately stopping the legal action and saving the family's home.

For Borrowers with Damaged Credit

Life happens. A divorce, a job loss, or a past financial mistake can lead to a low credit score or a past bankruptcy or consumer proposal. Even if a borrower has a huge amount of equity in their home, an 'A' lender will often decline them based on their credit. A private lender can look past the credit score and provide a loan based on the strong equity, giving the borrower the time they need to rebuild their credit.

For Unique Properties or Situations

Banks have rigid rules about the types of properties they will finance. A private lender can be much more flexible, providing financing for unique rural properties, agricultural land, construction projects, or even a down payment on a pre-construction condo.

The Mechanics of a Private Mortgage

The process and costs of a private mortgage are different from a bank loan. Transparency is key.

The Cost: Interest Rates and Fees

Because private lenders are taking on a higher risk, their costs are higher.

Interest Rates: You can expect the interest rate on a private mortgage to be higher than bank rates.

Fees: There are one-time setup fees involved. These typically include a lender fee (usually 1-3% of the loan amount) and a broker fee (usually 1-3%), which are paid from the mortgage proceeds on closing day.

The Application and Approval Process

The good news is that the application process is much faster and simpler than with a bank. We don't need to provide two years of tax returns and endless paperwork. The process is focused on two key items:

A professional appraisal of the property to confirm its value.

A clear explanation of the borrower's story and their plan to pay back the loan.

The All-Important "Exit Strategy"

This is the key to a successful private mortgage. No reputable mortgage broker will arrange a private loan without first building a clear and realistic exit strategy. This is the plan for how you will pay back the private lender at the end of the short term.

The exit strategy could be:

Selling the property (in the case of a property flip).

Refinancing with a prime 'A' or 'B' lender once the original problem (e.g., bruised credit, unprovable income) has been solved.

The private mortgage is the bridge; the exit strategy is the destination on the other side.

Getting a Private Mortgage in Canada

A private mortgage is a specialized tool, not a loan of last resort. It's a strategic solution for situations that require speed, flexibility, and an asset-focused approach. When used correctly for a specific purpose and with a clear exit plan in place, it can solve complex problems and unlock financial opportunities that would otherwise be impossible.

The key to navigating this space safely is to work with an experienced and licensed mortgage broker. We have access to a network of reputable private lenders and have a legal duty to ensure that any loan we arrange is suitable for your needs.

If you're facing a situation where the bank can't help, you still have powerful options. Contact our brokerage today for a confidential consultation to see if a private mortgage is the right strategic tool for you.

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