In the structured world of real estate financing, most homebuyers follow a well-trodden path that leads to the front door of a major bank or credit union. But what happens when that door closes? What if your credit history has a blemish, your income is unconventional, or you face a unique situation that doesn’t fit neatly into the traditional lending box? For a growing number of Ontarians, the answer lies in an alternative and often misunderstood corner of the market: the private mortgage.

A private mortgage is not a loan from a bank. It is a short-term financing solution funded by an individual investor or a group of investors. It operates with a different set of rules, a different philosophy, and a different cost structure. While not a permanent solution, a private mortgage can serve as a vital strategic bridge, providing the funds needed to overcome a temporary obstacle and get back on the path to traditional financing.

Who are Private Lenders?

Unlike the A-lenders (major banks) and B-lenders (alternative lenders like trust companies) that are provincially or federally regulated institutions, private lenders are individuals or corporations. The funds for a private mortgage come from two primary sources:

  1. Wealthy Individuals: A private person with significant capital may choose to invest directly in real estate by lending their money out as a mortgage, secured by the borrower’s property.
  2. Mortgage Investment Corporations (MICs): These are companies that pool money from numerous individual investors and then lend that capital out in the form of private mortgages. For the investors, it’s a way to earn a high return; for the borrower, it’s a source of financing when all other doors have closed.

The Private Lending Philosophy: It’s All About the Asset

The single most important difference between a bank and a private lender is their underwriting focus.

  • Banks and Traditional Lenders are primarily focused on the borrower. They scrutinize your credit score, verify your income down to the dollar, and require you to pass the government’s mortgage stress test.
  • Private Lenders are primarily focused on the asset. Their main concern is the property itself—its value, its location, and its marketability. They want to know how much equity in a home a borrower has.

Private lenders use a metric called Loan-to-Value (LTV). They will typically lend only up to a maximum LTV of 75-85%. This means that if your home is worth $800,000, a private lender might lend a maximum of $680,000 (85% LTV). This large equity cushion protects the lender. If the borrower defaults, the lender is confident they can take possession of the property, sell it, and easily recoup their principal investment, interest, and any legal costs.

Because of this asset-based approach, private lenders can often overlook issues that would be automatic deal-breakers for a bank, such as a low credit score or non-traditional income.

Common Scenarios for a Private Mortgage in Ontario

A private mortgage is a problem-solving tool. It’s used when a borrower is facing a situation that traditional lenders cannot or will not accommodate. Common scenarios include:

  • Credit Issues: For a borrower with a recent bankruptcy, a consumer proposal, or a credit score that is too low for even B-lenders. A private mortgage can provide a one-to-two-year window to rebuild credit.
  • Unverifiable Income: For a self-employed business owner who cannot prove sufficient income through traditional tax documents.
  • Bridge Financing: To “bridge” the financial gap for a homeowner who has purchased a new property before the sale of their existing home has closed.
  • Emergency Situations: To provide immediate funds to halt a foreclosure or power of sale, or to pay off urgent CRA tax arrears or other high-interest debts.
  • Renovation and Construction Loans: For financing a major renovation or a new build, where funds are released in stages (draws) as work is completed—a structure many traditional lenders avoid.

The High Cost and High Risk of Private Money

This flexibility comes at a significant cost. Private mortgages are the most expensive form of mortgage financing.

  • High Interest Rates: While bank rates might be in the 5-7% range (as of late 2025), private mortgage rates typically start around 8% and can go as high as 18%, depending on the perceived risk of the deal.
  • Interest-Only Payments: The vast majority of private mortgages are structured as “interest-only” loans. This means your monthly payment only covers the interest charged; it does not pay down any of the principal loan balance. At the end of the term, the full principal amount is still owed.
  • Setup Fees: Unlike traditional mortgages, private loans come with mandatory setup fees. These typically include a lender fee (1-3% of the loan amount) and a mortgage broker fee (also around 1-3%), which are usually deducted directly from the mortgage funds.

The Most Important Component: The Exit Strategy

A private mortgage should never be viewed as a long-term solution. It is a temporary bridge designed to get you from Point A (your current problem) to Point B (a stable financial situation).

Before any reputable mortgage broker arranges a private loan, they will insist on developing a clear and realistic “exit strategy.” This is the detailed plan for how you will pay back the private lender at the end of the short term (usually 6 to 24 months) and transition back to a more affordable, traditional mortgage. A private mortgage without a viable exit strategy is a debt trap.

Common exit strategies include:

  • Following a strict plan to repair your credit score over 12-24 months.
  • Selling the property to pay off the loan.
  • For a business owner, establishing a two-year history of declared income to qualify at a B- or A-lender.
  • Using the private funds for renovations that increase the home’s value, allowing for a conventional refinance upon completion.

Private mortgages play a crucial role in the Ontario real estate market, offering customized, short-term solutions when institutional lenders say no. They provide the liquidity and flexibility to solve complex financial problems, from saving a home from foreclosure to enabling a quick property purchase.

However, they are a powerful tool that must be handled with extreme care. The high interest rates and fees mean they are unsustainable as a permanent financing solution. If you are considering a private mortgage, it is essential to work with an experienced mortgage broker who can connect you with reputable lenders and, most importantly, help you build a solid exit strategy. A private mortgage can be an effective bridge to a better financial future, but you must always have a clear view of the other side.