Private mortgages occupy a specific place in the Canadian lending landscape. They serve borrowers who, for various reasons, cannot access conventional bank financing — but they come with costs and considerations that demand careful evaluation.
As a Level 2 mortgage agent, I have access to both conventional lenders and private lending sources. This dual access means I can objectively assess which pathway serves each client's interests. In this piece, I want to examine private lending honestly: when it makes sense, when it does not, and how to think through the decision.
What Is Private Lending?
Private mortgages are loans provided by individuals or private lending companies rather than banks, credit unions, or other regulated financial institutions. The funds come from investors seeking returns higher than they would earn from GICs or bonds, secured by real estate.
Because private lenders are not bound by the same regulations as banks, they can approve borrowers who would not qualify for conventional financing. This flexibility comes at a price — quite literally. Private mortgage rates typically range from 8% to 15% or higher, compared to the 4% to 6% range for conventional mortgages at time of writing.
Beyond the higher rates, private mortgages typically involve:
- Lender fees: Usually 1% to 3% of the loan amount, deducted from proceeds or added to the mortgage
- Shorter terms: Typically one year, requiring annual renewal or refinancing
- Lower loan-to-value ratios: Most private lenders cap at 75% to 80% of property value
- Interest-only payments: Many private mortgages require only interest payments, with principal due at term end
These features make private mortgages more expensive than conventional alternatives. The question is whether that expense is justified by your circumstances.
When Private Lending Makes Sense
Private mortgages are not inherently problematic — they serve real needs for real people. The following scenarios represent situations where private lending often makes sense:
Bridge financing for timing gaps. You have sold your current home and purchased a new one, but the closing dates do not align. You need short-term financing to bridge the gap. Private bridge loans serve this purpose well — the higher rate matters little over a 30- or 60-day period, and the flexibility outweighs the cost.
Self-employed with strong equity but complex income. Your business throws off significant cash, but your tax returns show modest income after legitimate business deductions. Banks see only the tax return figure; private lenders can consider the fuller picture when substantial equity supports the loan. A private mortgage may bridge you while you restructure income presentation or build the tax return history banks require.
Credit repair in progress. A credit event — bankruptcy, consumer proposal, missed payments during a difficult period — temporarily disqualifies you from conventional lending. If you have equity and stable income, a private mortgage can provide time for credit repair. After 12 to 24 months of on-time payments and credit rebuilding, transition to conventional rates becomes possible.
Non-standard property types. The property itself may not qualify for conventional financing: a rural property with unusual features, a mixed-use building, or a property requiring substantial renovation before it meets lender standards. Private lenders evaluate these situations individually where banks apply rigid criteria.
Speed requirements. Conventional mortgage approvals take weeks; private approvals can happen in days. When timing is critical — perhaps you are purchasing an estate sale or responding to a foreclosure opportunity — private lending's speed provides access that conventional timing cannot match.
When Private Lending Does Not Make Sense
Equally important: recognizing when private lending creates more problems than it solves.
As a permanent solution. Private mortgage rates are sustainable for short periods, not indefinitely. If you cannot articulate a clear path from private lending to conventional financing within one to two years, the math works against you. The compounding cost difference between 10% and 5% interest devastates household finances over time.
When the underlying problem is unresolved. If you cannot qualify for conventional financing because of income-to-debt ratios that will not improve, taking a private mortgage only delays and worsens the inevitable. Adding the higher interest burden to already stressed finances accelerates rather than resolves the problem.
To purchase a home you cannot actually afford. Private lending's flexibility should not be used to buy beyond your means. If you cannot qualify conventionally, that qualification failure may be signaling something important about affordability. Ignoring that signal can lead to financial distress.
When better options exist. Before accepting private lending, ensure you have exhausted alternatives. B lenders — institutions between prime banks and private lenders — offer rates significantly below private lending for borrowers who do not quite fit prime criteria. Alternative lenders, credit unions, and specialized programs may provide access you have not discovered.
Evaluating a Private Lending Opportunity
If private lending makes sense for your situation, evaluation matters. Not all private lenders are equivalent, and the details of any offer deserve scrutiny.
Understand the total cost. Calculate not just the monthly payment but the total cost including fees, legal costs, and any prepayment penalties. A 10% rate with 2% lender fees costs more than an 11% rate with no fees over a one-year term.
Clarify renewal terms. What happens at the end of the term? Is renewal guaranteed, and at what rate? Some private lenders use aggressive renewal terms to extract fees from borrowers who have limited alternatives at term end.
Understand prepayment options. If you secure conventional financing before term end, can you exit the private mortgage? What penalties apply? The ability to leave without punitive penalties matters significantly.
Verify the lender's legitimacy. Private lending includes reputable investors alongside predatory actors. Work with established private lenders or mortgage investment corporations (MICs) rather than individuals you cannot verify. Your mortgage broker should know their private lending sources well.
My Approach to Private Lending
When clients come to me with situations that may require private lending, my process follows a specific pattern:
First, exhaust conventional options. My network of 50+ lenders includes B lenders and alternative institutions. Before recommending private lending, I verify that no conventional or near-conventional solution exists. Often, borrowers who believe they need private lending actually qualify for B lender products at significantly lower rates.
Second, establish an exit strategy. If private lending is necessary, we discuss how and when you will transition to conventional financing. What needs to change? How long will it take? Is the timeline realistic? Without a credible exit strategy, I am reluctant to recommend private lending.
Third, select appropriate private sources. Not all private lenders suit all situations. I match borrowers with private lenders whose terms, rates, and flexibility align with the specific need. A bridge loan requires different lender characteristics than a credit repair situation.
Fourth, document the true cost. I ensure you understand the complete cost comparison: what private lending costs versus what conventional financing would cost, and what you are paying for the flexibility private lending provides.
The Math That Matters
Consider a $500,000 mortgage. At a 5% conventional rate, monthly interest is approximately $2,083. At a 10% private rate, monthly interest is approximately $4,167. That is $25,000 in additional annual interest cost.
For short-term bridge financing — say, two months — the additional cost of $4,167 may be entirely reasonable given the flexibility provided. For a borrower who remains in private lending for three years while "working on credit," the additional cost exceeds $75,000. That sum, invested differently, might have resolved the underlying issue.
This math exercise is not meant to frighten but to clarify. Private lending serves valuable purposes when those purposes are short-term and specific. When private lending becomes a semi-permanent state, the mathematics become punishing.
The Conversation I Want to Have
If you believe private lending may be appropriate for your situation, I welcome a conversation. I will ask direct questions: What created the need for private lending? What is your plan to transition to conventional financing? Is that plan realistic given your circumstances?
Sometimes the answer is that private lending makes sense and serves your interests. Sometimes the answer is that we should explore alternatives first. Occasionally, the answer is that financing — private or otherwise — is not the right path at this moment.
My role is to provide honest assessment, not to facilitate lending that does not serve your interests. If private lending is the right tool for your situation, I will help you access competitive private options with appropriate terms. If it is not, I will tell you so directly.
Contact me to discuss your situation. Whether the answer involves private lending, alternative lenders, or a different path entirely, the conversation starts with understanding your specific circumstances.
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