What is a private mortgage?
Turned down by the bank? Need to close fast? Bridging a gap while you sell? Private mortgages exist for exactly these situations, and they can be the right tool. But borrowers often treat a private mortgage like a bank mortgage with a higher rate — and that mistake is where the trouble starts. The differences run much deeper than the interest rate.
What borrowers miss
A private mortgage is a loan secured against your property from someone other than a traditional bank or credit union — an individual investor, a group of investors, or a mortgage investment corporation (MIC), usually arranged through a mortgage broker. Private lenders lend primarily against the equity in your property rather than your income and credit score, which is why they can say yes when the bank says no — and close in days rather than weeks.
That flexibility is the product. Here’s what it costs, beyond the rate.
1. The fees can rival the interest
The quoted rate is only part of the cost. Private deals typically stack a lender fee and a broker fee — often a percentage of the loan each — plus the lender’s legal fees, which you pay. On a one-year loan, fees alone can add the equivalent of several percentage points to your effective borrowing cost. Before signing, ask for the total cost of borrowing in dollars, not just the rate. Ontario law requires disclosure of the cost of borrowing — read it.
2. The term is short, and that’s the whole game
Bank mortgages run five-year terms with 25-year amortizations. Private mortgages typically run six months to two years, often interest-only. The principal doesn’t shrink; the loan is designed to be exited — refinanced with a bank, or repaid from a sale. What borrowers miss: the loan is only as good as your exit plan. If you can’t qualify with a bank at the end of the term, you’re renewing at the lender’s price or facing enforcement. Have a realistic exit strategy before you take the loan, not at month eleven.
3. Renewal is a privilege, not a right
A bank almost always offers renewal. A private lender has no obligation to. If the market shifts or the lender wants their money back, you must pay out on maturity — and a lender who knows you can’t leave has all the leverage on renewal fees and rates.
4. Default happens faster and costs more
Private mortgage documents are less forgiving than bank ones. Watch for: default triggered by a single missed payment or even a missed property tax instalment; default interest rates that jump the moment you’re offside; per-incident administration fees; and lenders who move to enforcement — demand letters, notices of sale, power of sale proceedings — much faster than a bank would. Enforcement costs get added to your mortgage debt, and they mount quickly.
5. Prepayment isn’t free — and sometimes isn’t allowed
Many private mortgages are closed or have minimum-interest clauses: pay the loan out early and you still owe three or six months’ interest, or interest for the full term. If your plan is to sell or refinance quickly, the prepayment terms matter as much as the rate. Get a discharge and prepayment provision you can live with before you sign the commitment.
6. The commitment letter is where the deal is made
By the time mortgage documents arrive for closing, the terms are set. The time to negotiate — fees, prepayment, renewal, default terms — is at the commitment letter stage. Borrowers routinely sign commitments unread because the closing is urgent. Days later, they’re asking their lawyer whether the terms can be fixed. Usually, they can’t.
7. Second mortgages multiply the risk
Many private loans sit as second mortgages behind a bank first. Miss payments on either and you can face enforcement from both, and a second-position lender protecting its security can force a sale even where your first mortgage is in good standing. The combined loan-to-value across both mortgages — and the priorities between the lenders — deserve careful attention.
Why your own lawyer matters more, not less
In a private deal, the lender’s lawyer papers the transaction — and acts for the lender. Some lenders even require you to get independent legal advice precisely because the terms are aggressive. Your own lawyer’s job is to read the commitment and mortgage before you’re committed, translate the fee stack into a real cost of borrowing, flag the default and prepayment traps, and make sure the numbers on closing match the numbers you were promised.
Private mortgages are a legitimate, sometimes essential tool — bought properly. Bought blind, they’re how people with substantial home equity end up losing it.
The bottom line
A bank mortgage is a commodity; a private mortgage is a negotiated deal. Treat it like one. Know your total cost, know your exit, and get the terms reviewed before you sign the commitment — not on closing day.
Considering a private mortgage — or lending on one? Barbarian Law™ acts for borrowers and private lenders across Ontario: commitment reviews, ILA, closings, and vendor take-back mortgages.
📞 Contact Barbarian Law before you commit.
This article is general information, not legal advice. Every situation is different — speak with a lawyer about yours.
