Before your mortgage lawyer prepares a single document, before a single dollar is advanced, and before title is searched, your lender sends you a commitment letter. Most borrowers skim it, sign it, and move on. That is a mistake. The commitment letter is the blueprint for your mortgage, and what it says — and what it does not say — matters enormously.
What a Commitment Letter Is
A mortgage commitment letter is a written offer from a lender to advance mortgage funds on specific terms and conditions. It is not the mortgage itself — that document comes later, prepared by your lawyer and registered on title. But the commitment letter sets out the economic and legal framework that the mortgage will follow.
For institutional lenders (banks and credit unions), commitment letters follow relatively standardized formats. For private lenders, they vary enormously — and that variation is exactly why they deserve careful attention.
The Core Terms You Need to Understand
Principal Amount
The commitment will state the amount the lender is willing to advance. Confirm this matches what you negotiated. If you need $500,000 and the commitment says $480,000, that gap is your problem to solve before closing day — not after.
Interest Rate and Calculation Method
Interest rates in commitment letters are expressed in various ways. Institutional lenders typically quote an annual rate calculated semi-annually, not in advance (the standard under the Interest Act for residential mortgages). Private lenders sometimes quote monthly rates or rates calculated differently.
A monthly rate of 1% sounds manageable. But 1% per month equals approximately 12.68% per year compounded monthly — and the effective annual rate differs from both. Make sure you understand the annualized cost of your borrowing, not just the quoted rate.
Term and Amortization
The term is how long this mortgage agreement lasts before you must renew or repay. The amortization is the total repayment timeline if you made minimum payments forever. A 25-year amortization with a one-year term means you will have a significant balance remaining at the end of year one — and you will need to refinance or repay at that point.
Private mortgages frequently have short terms of six months to two years. Know exactly when the mortgage matures and what your plan is for repayment or renewal.
Payment Structure
Is the mortgage interest-only or does it require principal and interest payments? Many private mortgages are interest-only, which keeps monthly payments lower but means the full principal is still outstanding at maturity. This is not inherently problematic — but it must be planned for.
Conditions in the Commitment: The Hidden Obligations
Most commitment letters are conditional — the lender’s obligation to advance funds depends on certain conditions being met before closing. Common conditions include:
- A satisfactory appraisal of the property confirming value
- Confirmation of title insurance
- Evidence of fire and property insurance naming the lender as mortgagee
- Satisfactory review of income documentation or financial statements
- No material adverse change in the borrower’s financial position
- Legal opinion from the lender’s lawyer confirming clear title
Each of these conditions must be satisfied before funds are advanced. If you cannot satisfy a condition — for example, if the appraisal comes in below the purchase price — the lender may reduce the loan amount or decline to advance altogether.
Read the conditions carefully and confirm, with your lawyer’s help, whether you can satisfy each one. Do not assume conditions are formalities.
Fees and Costs: Reading the Fine Print
Private lender commitment letters frequently include fees that institutional commitment letters do not. Watch for:
- Lender fees (also called origination fees or broker fees) — often one to three percent of the loan amount
- Legal fees payable to the lender’s lawyer — separate from your own legal fees
- Appraisal fees
- Administration or processing fees
- Prepayment penalties or restrictions
These costs can add thousands of dollars to the total cost of borrowing. The commitment letter may not present them all clearly in one place. Your lawyer can help you calculate the all-in cost of the mortgage and compare it to alternatives.
Commitment Letters and Your Lawyer
Your real estate or mortgage lawyer should receive a copy of the commitment letter before the transaction proceeds. They will confirm that the mortgage terms as documented in the commitment are accurately reflected in the mortgage instrument that gets registered on title, flag any unusual or potentially problematic clauses, confirm that all conditions can be satisfied, and advise you if any terms are unusual or potentially predatory.
This review is not bureaucratic overlap — it is a critical protection. The mortgage your lawyer registers is what you are legally bound by. Ensuring it matches what you agreed to in the commitment letter is the lawyer’s job.
What Happens If You Sign the Commitment But Don’t Close?
Signing a commitment letter is not the same as signing the mortgage. However, some commitment letters include provisions that entitle the lender to fees or damages if you accept the commitment and then fail to close. Read the commitment’s cancellation and non-performance provisions carefully before signing.
Final Thoughts
The commitment letter arrives at a moment when most borrowers are relieved — ‘The money is coming.’ But that relief can lead to superficial review of a document that defines your borrowing relationship for months or years. Take the time to read it carefully, ask questions about anything you do not understand, and have your lawyer review it before you sign. It is the most important document in your mortgage transaction that is not actually a mortgage.
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Goldstone Law Professional Corporation serves clients across Mississauga, Brampton, Oakville, and the greater GTA in real estate, corporate, estate, and mortgage law. Whether you are buying your first home, structuring a business deal, or planning your estate, our team provides the clear, practical legal guidance you need.
Visit goldstonelawpc.com or call us at 905-595-9917. We are located at 201-186 Robert Speck Parkway, Mississauga, ON L4Z 3G1.
Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified Ontario lawyer.
This article is provided for general information only and does not constitute legal advice. For advice about your specific situation, please contact Goldstone Law PC directly.