Your financial reality doesn't always fit traditional lending templates. As a self-employed entrepreneur, your business generates strong revenue—but tax write-offs legitimately reduce your reported income. As a real estate investor, you've built a profitable portfolio—but traditional lenders cap financing at 4-6 properties. As a homeowner with substantial equity, you're navigating a life transition—divorce settlement, career change, credit rebuilding—that temporarily affects conventional qualification.
A private mortgage is a loan secured by real estate but funded and underwritten by private lenders—individuals, mortgage investment corporations (MICs), or private lending institutions—rather than traditional banks. These lenders evaluate your application using different criteria, focusing primarily on property equity and exit strategy rather than rigid income documentation and credit formulas.
Private mortgages provide financing solutions for borrowers with legitimate borrowing capacity demonstrated through property ownership, business cash flow, rental income, or other non-conventional sources. Whether you're scaling a business, expanding an investment portfolio, or managing a personal transition, this guide explains what private mortgages are, how they differ from bank mortgages, who uses them, typical costs, and most importantly—when they make strategic sense versus when they don't.
Defining a Private Mortgage
A private mortgage is a short-term loan (typically 6-24 months) secured by real estate, provided by private capital sources rather than traditional financial institutions. The fundamental structure is identical to a bank mortgage—you borrow money, pledge your property as security, make monthly payments, and repay the principal at term end or through refinancing.
The critical difference lies in underwriting criteria—how the lender evaluates whether to approve your application.
Bank Mortgage Underwriting
- Income: 2 years tax returns (Notice of Assessment)
- Credit Score: Typically 680+ required
- Employment: 2+ years stable employment
- Debt Ratios: GDS under 39%, TDS under 44%
- Documentation: Pay stubs, employment letters, tax returns
- Approval Timeline: 4-8 weeks
- Focus: Can you afford payments based on tax return income?
Private Mortgage Underwriting
- Equity: Minimum 20-25% equity in property
- Exit Strategy: How will you repay or refinance?
- Payment Ability: Can you service interest during term?
- Property Value: Appraisal confirms marketability
- Documentation: Bank statements, business overview, property details
- Approval Timeline: 1-3 weeks
- Focus: Do you have equity + path to traditional refinancing?
Who Provides Private Mortgages?
Private mortgage capital comes from three primary sources in Ontario:
1. Mortgage Investment Corporations (MICs)
MICs are Canadian investment vehicles that pool capital from multiple investors to fund private mortgages. They're regulated federally under the Income Tax Act and provincially by securities regulators. MICs offer individual investors access to the private mortgage market without directly managing loans.
- Structure: Shareholders invest capital, MIC lends to borrowers, returns distributed to shareholders
- Regulation: Must distribute 100% of income annually (tax-advantaged for investors)
- Typical Rates: 7.99-12.99% to borrowers
- Best For: Standard private mortgage deals with clear exit strategies
2. Private Lending Institutions
These are non-bank lenders focused exclusively on alternative mortgage lending. They operate similar to MICs but may use different corporate structures (limited partnerships, private trusts).
- Capital Source: High-net-worth investors, pension funds, institutional capital
- Specialization: May focus on specific niches (construction, investment property, commercial)
- Typical Rates: 8.5-14.99%
- Best For: Larger loans ($500K+), complex scenarios
3. Individual Private Investors
Individual investors lending their own capital, often coordinated through mortgage brokers. These are typically high-net-worth individuals seeking secured investment returns.
- Flexibility: Can structure creative terms for unique situations
- Decision Speed: Often fastest approval (single decision-maker)
- Typical Rates: 9-14.99% (higher end for smaller loans or higher risk)
- Best For: Unique properties, non-standard scenarios, smaller loan amounts
Who Uses Private Mortgages? (You're Not Alone)
Private mortgages serve a diverse range of borrowers—not just people with poor credit or financial problems. Based on over 20 years of experience funding private mortgages in Ontario, here are the most common borrower profiles:
Self-Employed Business Owners
Entrepreneurs earning $150K-$500K annually but showing $45K-$80K on tax returns due to legitimate business write-offs (depreciation, vehicle, home office). Banks assess using Notice of Assessment income; private lenders use bank statements showing actual revenue. See full self-employed qualification guide.
Real Estate Investors Beyond Traditional Caps
Portfolio investors who've hit the 4-6 property cap at traditional banks. They have positive cash flow on existing properties but need financing for property #7, #8, #9+. Private lenders evaluate property-specific cash flow rather than personal debt ratios. Learn about investment portfolio financing.
Time-Sensitive Property Purchases
Buyers who've found their ideal property with closing in 3-4 weeks but haven't sold their current home yet. Bridge financing provides down payment funds, repaid when current home sells. Compare bridge loan options.
Recent Life Event Transitions
Separation/divorce (one spouse buying out the other), job change (strong income but less than 2 years employment), new business launch (solid revenue but less than 2 years business history). Private mortgages provide 12-24 month bridge while rebuilding traditional qualification.
Credit Rebuilding
Past credit challenges (consumer proposal completed, bankruptcy discharged 1-2 years ago, medical debt from illness) but now financially stable with steady income and property equity. Use private mortgage to demonstrate 12-24 months perfect payment history before traditional refinancing.
Power of Sale / Foreclosure Prevention
Homeowners facing power of sale who need emergency refinancing to pay arrears and stop the process. Have substantial equity but cannot qualify at traditional banks due to default status. See power of sale refinancing options.
Unique or Non-Traditional Properties
Mixed-use properties (commercial + residential), rural acreages, properties in small towns under 5,000 population, student housing near universities, short-term rental properties (Airbnb). Banks have strict property type restrictions; private lenders evaluate case-by-case.
How Much Do Private Mortgages Cost?
Private mortgages cost more than traditional bank mortgages—this reflects faster approval, flexible qualification, and short-term lending economics. Understanding total cost helps you evaluate whether the solution makes financial sense for your situation.
Interest Rates
Typical Range: 7.99-14.99% annually (fixed for term)
Rate determination factors:
- Loan-to-Value (LTV): Lower LTV = lower rate. 50% LTV may get 7.99%, 75% LTV may get 11-13%
- Exit Strategy Strength: Clear path to traditional refinancing = better rate
- Property Type & Location: Standard residential in major city = best rates; rural/unique = higher
- Borrower Profile: Strong income/credit despite bank rejection = better rates
- Loan Size: Larger loans ($500K+) often get better rates due to economies of scale
Fees and Costs
Complete Fee Breakdown ($300,000 Private Mortgage)
Upfront Costs (Paid at Closing):
- Lender Fee (1-3%): $3,000-$9,000 (deducted from loan proceeds)
- Appraisal Fee: $300-$500 (paid directly to appraiser)
- Legal Fees: $800-$1,500 (your lawyer for mortgage registration)
- Broker Fee (if applicable): Often included in lender fee, sometimes separate 0.5-1%
- Total Upfront: $4,100-$11,000
Ongoing Costs (Monthly/Annual):
- Interest (10% rate example): $2,449/month ($29,394/year)
- Property Tax: Remains your responsibility (unchanged)
- Property Insurance: Required (lender must be named on policy)
Exit Costs (When Repaying or Refinancing):
- Discharge Fee: $75-$150 (lender legal cost to remove mortgage from title)
- Legal Fees (Refinancing): $800-$1,500 (if refinancing to another lender)
- Prepayment Penalty: Usually none (private mortgages encourage early repayment)
12-Month Total Cost Example: $4,100 upfront + $29,394 interest + $225 discharge = $33,719 total cost for $300,000 loan over 12 months. This represents 11.2% effective annual rate (APR) when fees are included. See detailed cost analysis and calculations.
When Private Mortgages Make Sense (Strategic Use Cases)
Private mortgages are not cheaper alternatives to bank mortgages—they're solutions for specific situations where bank financing is unavailable or impractical. Here's when they make strategic sense:
✓ You Have Equity But Can't Qualify Traditionally
You own property with 30%+ equity, earn solid income, but tax returns, credit score, or employment history don't meet bank standards. Private mortgage provides access to your own equity while you work toward traditional qualification.
✓ Timing is Critical (Need Funds Within 3 Weeks)
Property closing, business opportunity, or emergency situation requires funds faster than bank timelines allow. Short-term higher cost is acceptable to capture the opportunity or resolve the crisis.
✓ Clear Exit Strategy Exists (6-24 Months)
You have a definitive plan to refinance to a traditional bank (income documentation rebuilding, credit repair, employment stability, property sale). Private mortgage is truly temporary, not indefinite.
✓ Cost is Justified by Outcome
Paying $15K-$35K in costs over 12 months is worthwhile to: (1) save $200K+ equity from power of sale, (2) buy dream property before it's sold, (3) expand business with time-sensitive equipment purchase, or (4) complete profitable renovation before refinancing.
✓ You Can Afford the Monthly Payments
Interest-only payments on private mortgages are higher than traditional mortgages. If $300K loan at 10% = $2,449/month is manageable within your cash flow, private mortgage works. If this payment creates financial stress, explore alternatives.
When Private Mortgages DON'T Make Sense
Private mortgages are powerful tools but not universal solutions. Avoid private mortgages in these situations:
✗ You Have Minimal Equity (Under 20%)
Private lenders typically require 20-25% equity minimum. If you have 10-15% equity, private mortgages aren't accessible. Consider selling if you can't afford payments, or explore government programs (if applicable).
✗ You Cannot Afford Interest Payments
Private mortgages require monthly interest payments. If you have no income, savings, or payment source, you'll default within months—losing your home anyway. Address income stability before pursuing any mortgage.
✗ You Have No Clear Exit Strategy
If you can't identify how you'll repay or refinance within 24 months (property sale, income rebuilding, credit repair, business proceeds), a private mortgage just delays the inevitable. Work on fundamental financial stability first.
✗ You Qualify for Traditional Financing
If you have good credit (680+), stable documented income, and reasonable debt ratios, pursue traditional bank financing first. Private mortgages cost 3-6% more in interest—only use them when banks aren't an option.
✗ You're Seeking Long-Term Financing (5+ Years)
Private mortgages are short-term by design (6-24 months). If you need 5-10 year financing with no clear path to traditional qualification, address the underlying qualification barriers (income documentation, credit repair) before borrowing.
Private Mortgages vs. Other Lending Options
| Factor | Bank Mortgage | B-Lender (Alt-A) | Private Mortgage |
|---|---|---|---|
| Interest Rate | 5.5-7% | 6.5-9% | 7.99-14.99% |
| Credit Score | 680+ required | 600-679 acceptable | 500+ acceptable |
| Income Verification | 2 years tax returns | Alternative docs accepted | Bank statements, cash flow |
| Approval Timeline | 4-8 weeks | 2-4 weeks | 1-3 weeks |
| Term Length | 5 years typical | 1-3 years | 6-24 months |
| Upfront Fees | Minimal ($0-$500) | 0.5-1.5% | 1-3% |
Frequently Asked Questions
Are private mortgages regulated in Ontario?
Yes. Private mortgage lenders and brokers in Ontario must be licensed by the Financial Services Regulatory Authority (FSRA). This licensing ensures compliance with provincial mortgage regulations, disclosure requirements, and borrower protection standards. Always verify your lender's FSRA license before proceeding.
Can I pay off a private mortgage early without penalty?
Most private mortgages allow prepayment without penalty—this is by design, as lenders and borrowers both benefit from early exit to traditional financing. Always confirm prepayment terms in your mortgage agreement. Some lenders charge 1-3 months interest penalty, but this is less common in Ontario private lending.
Will a private mortgage hurt my credit score?
Private mortgages typically do not appear on credit bureau reports unless you default and the lender reports the default. Making on-time payments builds payment history but won't directly improve your credit score (since it's not reported). However, using a private mortgage responsibly while rebuilding credit elsewhere positions you for traditional refinancing within 12-24 months.
What happens if I can't repay or refinance when my private mortgage matures?
You have several options: (1) Request renewal with the same lender (reassessment required), (2) Refinance with a different private lender, (3) Extend your exit strategy timeline, or (4) Sell the property. Most private lenders prefer renewal over forcing sale—communicate proactively if you need more time. Read complete exit strategy guide.
Can I get a private mortgage on an investment property?
Yes. Private mortgages are commonly used for investment properties, especially when investors exceed traditional lender property caps or need financing for unique property types (student housing, short-term rentals, mixed-use buildings). Lenders evaluate rental income and property cash flow as part of qualification.
Key Takeaways
- ▸ Private mortgages fill qualification gaps: When traditional banks say no due to income documentation, credit, or employment factors, private lenders evaluate equity and exit strategy instead.
- ▸ Short-term by design (6-24 months): Private mortgages are temporary solutions with higher costs. Plan your exit to traditional financing from day one.
- ▸ Cost reflects value provided: Faster approval, flexible qualification, and equity-based underwriting justify 7.99-14.99% rates plus 1-3% fees—significantly higher than bank mortgages.
- ▸ Diverse borrower base: Self-employed business owners, real estate investors, bridge financing needs, life transitions, credit rebuilding, and unique property purchases. Private mortgages serve strategic borrowers, not just credit-challenged ones.
- ▸ Use strategically, not as default: Private mortgages make sense when you have equity, can afford payments, have a clear exit strategy, and the cost is justified by the outcome. Avoid when these factors aren't present.
Get personalized guidance for your situation: Understanding whether a private mortgage fits your specific circumstances requires analysis of your equity position, income sources, exit strategy, and unique needs. Our specialists provide clear answers, transparent cost breakdowns, and honest recommendations.
