Getting turned down for a bank mortgage is more common than most people think — and in Ontario’s current lending environment, it happens to people who are not, by any reasonable measure, bad credit risks. Self-employed borrowers, investors with multiple properties, individuals in the middle of a transition between jobs, and buyers purchasing non-conventional properties all regularly find themselves outside the parameters of what institutional lenders will approve.
For these borrowers, private mortgage financing is often the answer. But private mortgages are not the same as bank mortgages — and understanding the differences, the risks, and the legal framework before you commit is essential.
What Private Mortgage Financing Is
A private mortgage is a loan secured against real property, provided by a private lender rather than a chartered bank, credit union, or other regulated institutional lender. Private lenders in Ontario include individuals, mortgage investment corporations (MICs), pension funds investing in mortgage products, and private syndicated lending operations.
The defining characteristics of private mortgages are their cost and their terms. Private mortgages carry higher interest rates than institutional mortgages — typically ranging from 8-15% or more, depending on risk factors — and shorter terms, commonly 6 months to 2 years. They are usually interest-only during the term, with a balloon payment of the full principal at maturity.
When Private Financing Makes Sense
Private mortgage financing is a legitimate tool in specific situations. Common scenarios where a private mortgage is appropriate:
- Bridging to institutional financing: A borrower who will qualify for a bank mortgage in the near future (after completing a probationary period at a new job, after clearing a credit issue, after closing a property sale) may use a private mortgage as a bridge.
- Purchase of non-conventional properties: Rural properties, properties with multiple units, commercial properties, and properties with title or condition issues may not qualify for institutional financing regardless of the borrower’s strength.
- Self-employed borrowers: Borrowers whose income is legitimate but difficult to document in the formats required by institutional lenders often have no difficulty meeting the financial obligations of a mortgage — but cannot satisfy the institutional documentation requirements.
- Speed of closing: Private lenders can often close more quickly than institutional lenders, which can be important in competitive transactions or where financing timelines are tight.
What private mortgages are not appropriate for is long-term financing at high rates that the borrower has no realistic exit strategy to repay. If you cannot explain how you will repay or refinance the private mortgage at the end of its term, the risk of using private financing is very high.
The Costs You Need to Understand
The true cost of a private mortgage is not simply the interest rate. It includes:
- Lender’s fee: Typically 1-3% of the mortgage amount, paid at the time of funding
- Broker’s fee: If a mortgage broker arranged the financing, their fee is typically also 1-3% of the mortgage amount
- Legal fees: Both the borrower and lender require their own lawyers — and the borrower typically pays both sets of legal fees
- Appraisal fee: Most private lenders require an independent appraisal of the property
- Title insurance: Required by most lenders
- Renewal fees: At the end of the initial term, renewal typically involves additional fees
On a $500,000 private mortgage, the upfront costs of fees alone can easily reach $15,000-$25,000 before the first interest payment. Borrowers who do not account for these costs in their financial planning are frequently caught off guard.
What the Mortgage Documents Actually Say
Private mortgage documents are not standardized in the way that bank mortgage documents tend to be. They vary significantly in their terms, and some provisions — particularly in lender-prepared agreements — can be quite aggressive in the rights they give the lender in the event of default.
Key provisions to review carefully before signing:
Interest Rate and Calculation Method
Confirm whether the interest rate is fixed or variable, how interest is calculated (simple vs. compound), and what the effective annual rate works out to when all fees are included in the calculation.
Default and Acceleration Provisions
What events trigger a default? How quickly can the lender accelerate the debt (demand full repayment) if you miss a payment? Some private mortgage documents allow the lender to exercise power of sale within a very short time of a missed payment — faster than many borrowers expect.
Renewal Rights
Do you have a guaranteed right to renew at the end of the term? At what rate? If the lender is not obligated to renew, you face refinancing risk at the end of the term — and if the market has changed or your credit profile has deteriorated, you may not be able to find replacement financing at an acceptable cost.
Prepayment Rights
Can you repay the mortgage early without penalty? Private mortgage lenders sometimes include prepayment penalties that make early exit more expensive than the borrower anticipated.
The Lawyer’s Role in a Private Mortgage Transaction
Unlike a bank mortgage — where the borrower may feel that the documentation is largely standardized — a private mortgage transaction requires careful independent legal review on the borrower’s behalf. Your mortgage lawyer will:
- Review the mortgage commitment letter and all related documents before you sign
- Explain the terms, including the costs, the default provisions, and the lender’s enforcement rights
- Conduct a title search to confirm the property can support the mortgage
- Confirm the priority position of the mortgage relative to any existing registered charges
- Register the mortgage at closing and ensure the lender’s security is properly documented
- Advise you on your exit strategy and what happens at the end of the term
For Private Lenders: Security That Actually Protects You
If you are the private lender in a mortgage transaction, proper legal documentation is equally critical. A properly registered mortgage in the correct priority position is the foundation of your security — but it needs to be supported by a current appraisal, title insurance, confirmation that property taxes are current, and (for second mortgages) an understanding of the first mortgagee’s terms and the borrower’s equity position.
Final Thoughts
Private mortgage financing fills a real gap in Ontario’s credit market. It provides access to capital for borrowers who cannot qualify through institutional channels, and it generates returns for lenders who accept the associated risk. But it is not a casual financial product. The costs are real, the terms are short, and the consequences of default are swift. Borrowers and lenders alike need experienced legal counsel to enter private mortgage transactions with their eyes open.
Ready to Get Legal Advice You Can Trust?
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.