When you’re facing a complex financial challenge, a private mortgage can feel like a lifesaver. It’s a powerful tool that provides fast, flexible financing when the big banks say no. But here’s a secret that every seasoned mortgage broker knows: the most important part of getting a private mortgage isn't the approval; it's the plan to pay it off.

In the world of private lending, this plan is called the "exit strategy." It’s your detailed roadmap for transitioning from a temporary, higher-cost loan back to a traditional, low-cost mortgage with a prime 'A' lender. Without a clear exit strategy from day one, a helpful tool can quickly become a financial trap.

This guide will explain why an exit strategy is non-negotiable for any borrower. We'll provide a step-by-step plan on how to successfully move from a short-term private loan back to a prime lender, a process that can save you tens of thousands of dollars and secure your financial future.

A Private Mortgage Exit Strategy Is Important

It’s crucial to understand the fundamental purpose of a private mortgage. They are designed to be a temporary solution to a temporary problem.

A "Bridge," Not a Destination

Think of a private mortgage as a bridge. It’s built to get you over a specific, immediate obstacle—like a damaged credit score, a property that needs urgent repairs, or income that’s difficult to prove to a bank. The bridge is strong and gets you to the other side, but you don't want to live on it.

Private mortgage terms are short for this reason, typically ranging from 6 to 24 months. Their interest rates and fees are higher than bank rates because private investors are taking on a risk that banks won't. The goal is to use the bridge and then quickly get back onto the solid ground of a long-term, low-cost mortgage.

Avoiding the "Renewal Trap"

What happens if there's no exit plan? When the 12-month term on your private mortgage ends and you're not in a position to get a bank mortgage, your only option is to renew with the private lender. This often means paying another set of lender and broker fees, and continuing to pay the high interest rate. This is the "renewal trap," a cycle of expensive debt that can slowly erode the equity in your home.

A Broker's Duty in Ontario

As licensed mortgage brokers in Ontario, we are regulated by the Financial Services Regulatory Authority (FSRA). Part of our job is a "suitability obligation"—we must ensure that the mortgage product we recommend is suitable for your needs. A key part of determining the suitability of a private mortgage is establishing a clear and viable exit strategy from the very beginning. A good broker doesn't just get you the loan; they show you the path out.

Learn more about home equity loans in Ontario

Check your eligibility in under 60 secs.

See How Much I Qualify For

Step 1: Solving the Original Problem

Your exit strategy doesn't start a few months before your term is up; it starts the day your private loan funds. The entire term of the loan should be spent actively fixing the one or two issues that prevented you from getting a bank mortgage in the first place.

If Your Problem Was Damaged Credit

If a low credit score was the issue, your 12- or 18-month term is your window to repair it. The plan is simple but requires discipline:

Get a secured credit card immediately.

Make every single payment on all your accounts on time, without fail.

Pay down all credit card balances to keep your utilization below 30%.

Do not apply for any other new credit.

The goal is to systematically and patiently rebuild your score to the 'A' lender threshold, which is typically around 680, before your private mortgage term expires.

If Your Problem Was Unprovable Income

This is common for self-employed individuals. A bank typically wants to see a two-year history of strong, declared income on your tax returns. If you're newly self-employed or had a couple of lean years, you won't meet this rule. The private mortgage buys you the crucial time needed to build that track record. Your exit strategy is to work with your accountant to file two consecutive years of solid tax returns (T1s and Notices of Assessment) that accurately reflect your income, making you a prime candidate for an 'A' lender.

If Your Problem Was Property Condition

For real estate investors using the BRRRR method, the property itself is the issue. It's distressed and needs work. The exit strategy is to complete all renovations on time and within budget. Once the work is done, you need to get the property tenanted with a signed lease agreement. This stabilizes the property and establishes a rental income history, which is essential for the eventual refinance.

Step 2: The Refinance Application

Once you've spent the term of the private mortgage solving the core problem, it's time to execute the final step of the exit strategy: refinancing with a prime lender.

When to Start the Process

Timing is critical. We advise our clients to start the refinance application process 3 to 4 months before their private mortgage term is set to expire. This provides a comfortable buffer to gather all the necessary documents, order a new appraisal, submit the application, and secure the approval from the new lender without the stress and pressure of an imminent renewal deadline.

What the 'A' Lender Will Now Look For

When we submit your new application to an 'A' lender, they will want to see clear evidence that the original problem has been solved. The required documents will include:

Proof of repaired credit: Your new, higher credit score from Equifax and TransUnion.

Two years of income history: Your Notices of Assessment from the CRA.

A new property appraisal: To confirm the current market value of your home.

Lease agreements and rental income statements, if the property is a rental.

A Broker's Role in "Telling the Story"

When you use a mortgage broker to get a private mortgage, we don't just submit a pile of documents to the new lender; we tell your story. We present a clean, professional application package that includes a cover letter explaining the "before and after." We show them the specific reason you needed the private loan in the first place, and then we provide the concrete evidence that proves you are now a strong, low-risk borrower who fully meets their lending guidelines. This narrative approach makes the underwriter's job easier and dramatically increases the chances of a smooth approval.

A Real-World Example: From Private to Prime

Let's look at a common scenario. Meet David, a self-employed contractor in Toronto. He had excellent cash flow but his last two tax returns were weak, showing very little declared income. His bank of 20 years declined him for a mortgage on a new home, despite his large down payment.

The Plan in Action

We secured David a 12-month private mortgage, which allowed him to purchase his family's new home. Our exit strategy was clear from day one. David's task during that year was to work closely with his accountant to meticulously track his business income and expenses and file a strong, accurate tax return for the year.

At the 9-month mark of his private mortgage term, we re-engaged. David now had one new, strong Notice of Assessment to pair with the previous year's.

The Result

We packaged his new income documents, a new appraisal on his home, and our cover letter explaining his business's growth and stability. We submitted the file to a major credit union known for its common-sense approach to self-employed borrowers. The result? David was approved for a new 5-year fixed mortgage at a prime 'A' lender interest rate. The new mortgage paid off the private loan in full, securing his family's financial future and saving him thousands of dollars a year in interest.

Exit Strategy: The Path Back to a Prime Mortgage

A private mortgage is a powerful and strategic tool, not a last resort. When used correctly, it can solve complex problems and unlock opportunities that would otherwise be impossible. But the single most important part of the strategy is the exit.

A good broker doesn't just get you into a private loan; they make sure you have a clear, realistic, and actionable plan to get out. The goal is always to use the private mortgage as a temporary bridge to get you back to the world of low-cost, prime lending.

If you are facing a complex financial situation and you need a private lender in Ontario, contact our brokerage today. Let's discuss if a short-term private mortgage with a solid exit strategy is the right plan to help you achieve your goals.

Get Personalized Advice

with an Award-Winning Mortgage Broker

4.9 from 812 reviews

Schedule My Call