Introduction
You’ve been turned down by your bank. Maybe your credit score took a hit after a rough couple of years, or you’re self-employed and your income is hard to verify on paper. Maybe you’re in the middle of a divorce, dealing with Canada Revenue Agency (CRA) arrears, or you’ve found a property that doesn’t fit the typical bank mould. Whatever the reason, you’re not alone, and you’re not out of options.
Private mortgages are a legitimate, widely used financing tool in Canada, and for many borrowers, they’re exactly the bridge needed to get from where you are today to where you want to be. This guide breaks down everything you need to know: what a private mortgage is, how it works, what it costs, and when it makes sense for your situation.
What Is a Private Mortgage?
A private mortgage is a loan secured against real estate that is funded by a private lender rather than a traditional financial institution such as a bank, credit union, or trust company. In Canada, private lenders operate outside the federally regulated lending system, which means they set their own approval criteria, rates, and terms.
Because private lenders take on more risk than banks, they charge higher interest rates and fees. In exchange, they offer something that banks often cannot: flexibility. Private lenders evaluate deals based primarily on the property’s value and the borrower’s equity, rather than relying heavily on credit scores, employment history, or income documentation.
Private mortgages are almost always short-term in nature, typically one year, and are generally used as a stepping stone while a borrower works to restore their financial standing and qualify for conventional financing.
Private Mortgage vs. Traditional Bank Mortgage
Understanding the differences between private and traditional mortgages helps you know what you’re agreeing to, and whether it’s the right fit.
| Feature | Bank/Traditional Mortgage | Private Mortgage |
|---|---|---|
| Approval criteria | Credit score, income, debt ratios | Primarily property value and equity |
| Stress test required | Yes (federally regulated lenders) | No |
| Interest rates | 5–7% (varies) | 7–15%+ (varies by risk) |
| Term length | 1–5 years, often longer | Typically 1 year |
| Lender fees | Minimal | 1–3% of mortgage amount |
| Approval speed | 2–4 weeks | Days to 1–2 weeks |
| Ideal for | Borrowers with strong credit and stable income | Borrowers with credit issues, non-traditional income, or unique properties |
One important distinction: private mortgages in Canada are not subject to the Office of the Superintendent of Financial Institutions (OSFI) stress test that applies to federally regulated lenders. This means you don’t need to qualify at a rate two percentage points above the contract rate, which can make private financing more accessible even though the rates are higher.
Who Provides Private Mortgages in Canada?
Private mortgage lenders in Canada fall into three main categories.
Individual private lenders are investors, often everyday Canadians with capital to deploy, who lend directly to borrowers and secure their investment against the property. They may be found through mortgage brokers or personal networks.
Mortgage syndicates pool money from multiple investors to fund a single mortgage. This spreads risk among investors and can allow for larger loan amounts.
Mortgage Investment Corporations (MICs) are structured entities that pool investor capital and lend it out as mortgages across a portfolio. MICs are a regulated type of private lender in Canada and are a common source of private mortgage funding.
In most cases, borrowers access private lenders through a licensed mortgage broker, who can shop your application across multiple private lender networks to find the best available terms.
Who Should Consider a Private Mortgage?
Private mortgages are not right for everyone, but they serve a genuinely important role for borrowers in certain situations. You may be a good candidate if you:
Have bruised or damaged credit. A low credit score, past consumer proposal, or discharged bankruptcy doesn’t automatically disqualify you from a private mortgage. Private lenders focus on equity, not your credit history.
Are self-employed or have non-traditional income. If you can’t produce the T4 slips and Notice of Assessment documents banks require, a private lender may accept stated income or alternative income documentation.
Are in a time-sensitive situation. Private mortgage approvals can happen in days. If you’re trying to avoid power of sale, close on a purchase quickly, or meet a tight deadline, private financing can move when banks cannot.
Own a non-conforming property. Properties that banks won’t touch, such as rural acreages, mixed-use buildings, or properties with title issues, may still qualify with a private lender as long as there is sufficient equity.
Are dealing with CRA arrears or judgements. Tax debt or legal judgements can block bank approval. Private lenders may still fund your mortgage and use the proceeds to clear the arrears, cleaning up your title in the process.
Are going through a separation or divorce. Relationship breakdown often creates short-term financial instability. A private mortgage can help one party buy out the other while a longer-term plan is developed.
How Private Mortgages Work: Terms, Rates, and Loan-to-Value
Private mortgages in Canada are secured against real property, meaning the lender registers a mortgage on title. They can be in first or second position.
Loan-to-Value (LTV) is the most important factor in a private mortgage decision. LTV is the mortgage amount expressed as a percentage of the property’s appraised value. Private lenders in Canada will lend up to 75-80% LTV for a first mortgage, and lower for second mortgages, often 65–75% combined with any existing first mortgage. The more equity you have in the property, the more favourable the terms you’re likely to receive.
Interest rates for private mortgages in Canada typically range from 8% to 15% or higher, depending on the lender, the property, the loan amount, and the perceived risk of the file. Second mortgages carry higher rates than firsts.
Terms are short, usually 12 months, though six-month and two-year terms are also available. At the end of the term, the mortgage must be renewed, paid out, or refinanced, ideally with a traditional lender once the borrower’s situation has improved.
Most private mortgages are interest-only, meaning your regular payments cover only the interest, and the principal balance does not change unless you make additional payments. This keeps monthly payments lower but means you’ll need a plan to repay the principal at the end of the term.
Costs and Fees: What to Budget For
Private mortgages cost more than bank mortgages, and it’s important to go in with a clear understanding of all the costs involved.
Interest rate. As noted above, rates commonly range from 8% to 15%+. Even a short one-year term at a higher rate represents a real cost, so factor this into your total borrowing calculation.
Lender fees. Private lenders typically charge a lender fee of 1% to 3% of the mortgage amount. On a $300,000 private mortgage, that’s $3,000 to $9,000, usually deducted directly from the funds advanced.
Broker fees. Because private mortgages require significant expertise to arrange, your mortgage broker may charge a broker fee, commonly 1% to 2% of the mortgage amount. This fee compensates the broker for sourcing and packaging the deal.
Legal fees. Both you and the lender will require independent legal representation. Budget $1,500 to $2,500 or more in legal fees.
Appraisal. Private lenders almost always require an independent appraisal to confirm the property value. Expect to pay $300 to $600 or more depending on the property type and location.
Total cost illustration: On a $300,000 private mortgage at 10% interest for 12 months, with a 2% lender fee and 1.5% broker fee, your all-in costs for the year, including interest and fees, could be in the range of $40,000 to $50,000. This is significant, and it’s precisely why private mortgages are best used as a short-term solution, not a long-term strategy.
Pros and Cons of Private Mortgages
Advantages
- Accessible when banks say no
- Fast approvals, sometimes within 48 hours
- Flexible qualification criteria; equity matters more than credit
- No stress test required
- Can rescue borrowers from power of sale or foreclosure
- Provides time to rebuild credit or resolve financial challenges
Disadvantages
- Significantly higher interest rates than traditional lenders
- Lender and broker fees add to the cost
- Short terms mean you must have an exit strategy
- Interest-only structure means the principal doesn’t decrease
- If your situation doesn’t improve, renewal may be on worse terms
When Does a Private Mortgage Make Sense?
A private mortgage makes the most sense when the cost of not getting the financing is greater than the cost of the private mortgage itself.
Consider these scenarios: avoiding a power of sale or foreclosure on your home, purchasing a time-sensitive property, consolidating high-interest debt that is costing more than the private mortgage rate, or bridging a gap while you rebuild your credit. In each case, the private mortgage solves an immediate problem and buys you time.
The key is always the exit strategy. Before entering a private mortgage, you and your broker should map out what needs to happen, whether that’s improving your credit score, documenting two years of self-employed income, or selling a property, so that you can transition to conventional financing when the private term ends.
The Application Process: What to Expect
Applying for a private mortgage through a licensed mortgage broker is straightforward. Here’s what the process typically looks like.
Step 1: Speak with us. Spark Mortgage has brokers that specialize in alternative lending will assess your situation, explain your options, and identify which private lenders are most likely to approve your file.
Step 2: Gather your documents. You’ll typically need identification, proof of property ownership (if refinancing), a recent mortgage statement, and details about the purpose of the funds. Private lenders care far more about the property than about your financials, but documentation still matters.
Step 3: Order an appraisal. The lender will require an independent appraisal of the property. This will be arranged through your broker. Private lenders will NOT accept appraisals provided by borrowers directly.
Step 4: Receive a commitment. Once the lender reviews the file and appraisal, they issue a mortgage commitment outlining the rate, term, fees, and conditions.
Step 5: Engage a lawyer. Both parties will retain lawyers to prepare and review mortgage documents and register the mortgage on title.
Step 6: Receive your funds. Once legal documents are signed, the funds are advanced, typically within a few business days.
Frequently Asked Questions
Will a private mortgage hurt my credit score? A private mortgage itself doesn’t appear on your credit bureau report the way a bank mortgage does, as private lenders generally don’t report to Equifax or TransUnion. However, if you default, legal action against you could affect your credit.
Can I get a private mortgage with a discharged bankruptcy? Yes, in many cases. Private lenders focus on equity and property value. A discharged bankruptcy is not necessarily a disqualifier, particularly if you have significant equity in the property.
Can I pay off a private mortgage early? This depends on the lender’s terms. Some private mortgages include a three-month interest penalty or a minimum interest guarantee. Review the commitment carefully before signing.
Do I need a minimum credit score? Most private lenders in Canada have no minimum credit score requirement. Some may set a floor, but it’s generally well below what banks require.
Can I get a private second mortgage? Yes. Private second mortgages are common, particularly for homeowners who have equity but don’t want to break an existing first mortgage. Second mortgages carry higher rates and lower LTV limits.
Conclusion: Private Mortgages Are a Tool, Not a Trap
Private mortgages sometimes carry a stigma, but the reality is that they are a legitimate, regulated part of Canada’s mortgage lending landscape. For borrowers facing circumstances that fall outside the traditional lending box, a private mortgage can be the difference between keeping a home, closing a deal, or taking control of a difficult financial situation.
The most important thing is to go in with your eyes open, understand the full cost, have a clear exit strategy, and work with a qualified mortgage broker who specializes in private lending.
If you’re exploring whether a private mortgage is right for your situation, our team at Spark Mortgage can walk you through your options, no obligation, no pressure.
