What You Need to Know About Private Mortgages Before You Borrow

A job loss, a rough patch with credit, or self-employment income that's hard to document are just some of the reasons you may not qualify for a traditional mortgage. If you've found yourself looking at private mortgage options, this is more common than you might think. 

While private mortgages offer an alternative option to traditional banks, they also come with higher costs, shorter timelines, and financial risks that are easy to underestimate when you're under pressure.

This article explains how private mortgages work in Canada, when they might make sense for you, and what to watch out for before you commit.

What Is a Private Mortgage?

A private mortgage is a home loan that comes from a private lender rather than a bank, credit union, or other traditional financial institution. Private lenders include individuals who lend their own money, groups of investors, and companies set up specifically to offer mortgage financing.

Unlike banks or credit unions, private lenders aren't federally regulated. Instead, they’re regulated by provincial bodies. For example, in Ontario, the Financial Services Regulatory Authority of Ontario (FSRA) oversees private mortgages.

The approval process works differently from traditional mortgages, too. Rather than focusing on your income or credit score, private lenders base their lending decisions on the property's value. That's what makes private mortgages accessible to people who wouldn't otherwise qualify. This increases risk, however, because approval is based on property equity rather than your ability to repay, which can make the loan harder to sustain over the long term.

Most private mortgages are structured as interest-only loans, which means your payments cover the interest but don't chip away at what you originally borrowed. While they may feel more manageable month to month, if the loan is renewed repeatedly, it can significantly delay your progress toward homeownership. The full amount remains owing at the end of the term, typically one to two years. They're designed as a financial bridge, not a permanent solution.

If you're buying a home with a private mortgage, most private lenders require a minimum 15% down payment, more than the 5% minimum required by traditional insured mortgages. That down payment becomes equity in the property, but your monthly interest-only payments won't add to it.

People turn to private lenders for all kinds of reasons: poor credit, high debt loads, irregular self-employment income, or the need for mortgage approval faster than a traditional bank can provide.

In practice, private mortgages serve a wider range of situations. What they share is a need for flexibility that traditional lenders can't offer.

Private Mortgage vs. Traditional Mortgage

The differences between a private mortgage and a bank mortgage go well beyond who's lending the money. They impact your costs, your approval experience, and what happens if things don't go to plan.

Key Differences in Cost, Approval, and Risk

It's worth paying close attention to the fee structure. On top of a higher interest rate, a private mortgage typically includes a lender fee (often 1% to 3%), a separate broker fee, and legal costs for both your lawyer and the lender's lawyer, usually deducted from your loan proceeds at closing. Those costs add up quickly.

When a Private Mortgage Might Make Sense

Private mortgages aren't right for everyone, but there are situations where they're a reasonable short-term tool. The key is going in with a clear plan: not just a way to secure financing today, but a realistic path to more affordable lending within one to two years.

If your credit has taken a hit, private lenders may still work with you. Most require a loan-to-value ratio below 85%, meaning you'd need at least 15% equity in your home to qualify, though this threshold varies depending on your credit profile, property location, and whether the mortgage is in first or second position. The first position means it's the primary loan on the property, while the second position means there's already another mortgage ahead of it, which would increase the lender's risk.

Understanding your credit score needed for a house is a useful starting point, as it helps you know exactly where you stand with traditional lenders before concluding that private is your only path.

If your income is self-employed or non-traditional (think freelancers, contractors, or business owners whose tax returns don't reflect their actual earnings), private lenders tend to be more flexible about how they verify income, accepting business bank statements rather than the tax returns that banks rely on.

And if you need to move quickly on a purchase, private lenders can often approve and fund within a few days, compared to several weeks with a traditional bank.

In all three cases, the same principle applies: a private mortgage works best when there's a realistic expectation that your credit profile, income documentation, or debt ratios will improve during the term. Without that, transitioning to traditional financing at renewal may be harder than it looks.

Risks and Costs to Consider

A private mortgage can solve a short-term problem. It can also create a bigger one down the road if you go in without fully understanding what you're signing up for.

Private mortgage rates typically start around 6% for first mortgages on well-positioned properties. They often climb into the double digits and past 15% for second or third mortgages, or in higher-risk situations. That's a meaningful premium over bank rates, and the interest rate is just the starting point.

When lender fees, broker fees, and legal costs are factored in, the true annual cost of borrowing is often substantially higher than it first appears.

Mike Bergeron, Counselling Manager at Credit Canada, explains why it's worth doing the full math: "A borrower should take steps to understand the true cost of a private mortgage, including all associated fees, and clarify what options are available if their financial situation improves or deteriorates during the term."

Most private mortgages run for one to two years. When the term ends, you either refinance with a traditional lender or renew, which often means another round of fees.

"It's essential to establish a clear exit strategy well before the term ends," says Bergeron. "If that exit plan doesn't materialize, a renewal may be possible; however, borrowers should be aware that renewals often come with additional fees, increasing the overall cost of the loan."

And because payments are interest-only, you're not building equity through repayment. Your down payment stays in the property, but your monthly payments don't add to it. Every payment goes to the lender's return, not toward owning more of your home. If the mortgage renews more than once, those costs start to compound in a way that can feel like running in place.

What Happens If You Can't Exit a Private Mortgage?

Going in with a plan is important. Ideally, exit planning should begin at least six to 12 months before your term matures, not when renewal discussions start. But life doesn't always cooperate, so it's worth thinking through what happens if that plan falls apart.

If your credit, income, or debt ratios haven't improved sufficiently by the end of your term, traditional lenders may still turn you down. That can leave renewal with your private lender as the only option, and it comes at a cost. That's why it's worth speaking with a mortgage broker well before your term ends to understand where you stand.

Getting a clear picture of your mortgage renewal options before your term ends gives you time to prepare and explore alternatives. And if you want to dig deeper into refinancing strategies, Credit Canada's mortgage refinancing webinar is a good place to start.

One of the clearest warning signs that things have gone off track is the cycle of repeated renewals paired with interest-only payments. "While these payments may help with monthly budgeting, they do nothing to reduce the principal balance," says Bergeron. "As a result, the borrower can remain stuck in a costly long-term pattern without ever moving closer to paying off the loan."

Defaulting also has real consequences. Private lenders hold security against your property, which means a power of sale is a real risk if you fall behind on payments. Before entering a second term, it's worth asking yourself: Has my credit improved? Is my debt load lower? Is my income more stable? If the answers are no, it may be time to explore a different path altogether.

Alternatives to Private Mortgages

A private mortgage isn't the only path forward when traditional financing isn't possible. Before committing to one, it's worth exploring whether a less costly option might work for your situation.

B lenders

B lenders, such as Home Trust or Equitable Bank, sit between traditional banks and private lenders. They're regulated financial institutions that tend to be more flexible on credit and income requirements than the big banks. If your credit score is in the 550–600 range, you may qualify with a B lender at a significantly lower rate than a private mortgage, so it's always worth checking before going the private route.

Improving your credit score

If time is on your side, working on your credit score before applying is another option worth considering. Paying down existing debt, catching up on any missed payments, and keeping credit utilization low can meaningfully improve your score within six to 12 months, potentially enough to qualify with a traditional lender.

Reducing your debt

For some Canadians, the underlying issue isn't really a financing problem. It's a debt problem. As Bergeron puts it: "Someone considering a private mortgage should speak with a Credit Counsellor or another qualified financial professional beforehand, especially if a high debt ratio is the main reason for seeking the loan."

If that resonates, contacting a non-profit credit counselling agency, like Credit Canada, is a good next step. You can speak with a certified Credit Counsellor for free to discuss different options for improving your credit. And if a Debt Consolidation Program (DCP), also known as a Debt Management Plan (DMP) is the right fit for you and your lifestyle, our team works with your creditors to reduce or stop the interest on your unsecured debts and bring your payments down to one manageable monthly amount.

Not sure where to start? Credit Canada's free debt assessment quiz takes just a few minutes and can give you a clearer picture of where you stand before you commit to anything.

Making an Informed Mortgage Decision

A private mortgage can be a legitimate short-term tool, but only when you go in with realistic expectations and a clear path towards a traditional mortgage by the time the term ends. That means knowing the true cost of borrowing, having a realistic exit plan, and thinking through what you'll do if that plan changes.

Before signing a private mortgage agreement, it's worth confirming:

• Can you comfortably afford the monthly interest payments throughout the term?
• Do you have a realistic exit strategy and a backup plan if it doesn't materialize?
• Have you asked for the full APR, including all lender fees, broker fees, and legal costs?
• Do you understand what renewal would cost if you can't transition to a traditional lender at term end?
• Have you explored alternatives like a B lender or improving your credit score?

If you’ve done all of the above and are still considering a private mortgage, speaking with a certified non-profit Credit Counsellor is a great first step to understanding your options. It's free, confidential, and there's no pressure to do anything you're not comfortable with. Reach out to Credit Canada today at 1 (800) 267-2272 to get started.

Or, if you’re not comfortable speaking with someone yet, chat with our AI-powered debt management agent, Mariposa, when it’s most convenient for you.

Frequently Asked Questions

What are the eligibility requirements for a private mortgage in Canada?

Private lenders focus primarily on your property's value and equity position. That is, how much of the home you actually own outright versus what's still owed on it. Most require a loan-to-value ratio below 85%, with lower limits sometimes applied to properties in less-liquid markets.

How long does it typically take to be approved for a private mortgage?

Private lenders can often move faster than banks, sometimes approving and providing funding within days versus weeks. The timeline depends on the lender, the complexity of the file, and how quickly a property appraisal can be arranged.

Can private mortgage lenders help people with bad credit?

Yes. Private lenders routinely work with people who have poor credit, as long as there's enough equity in the property. The lower your credit score, the more equity you'll typically need, and the higher the rate you can expect.

Are private mortgages regulated in the same way as bank mortgages in Canada?

No. Private lenders are regulated provincially, not federally. In Ontario, for example, the Financial Services Regulatory Authority of Ontario (FSRA) oversees the mortgage brokers who arrange private loans. Other provinces have their own regulatory bodies. It's always a good idea to work with a provincially licensed broker and read all terms carefully before signing.

What should I consider when comparing multiple private mortgage offers?

Look beyond the interest rate. Ask each lender for the full Annual Percentage Rate (APR), which includes all fees, so you can compare the true cost. Confirm who pays legal costs, whether the broker fee is separate from the lender fee, and what renewal terms look like if your exit strategy doesn't come together.