What a private mortgage is
A private mortgage is a loan secured against real property and funded outside ordinary bank, credit-union or prime institutional lending channels.
The lender may be:
An individual investing personal capital
A private lending company
A mortgage investment corporation, or MIC
A mortgage fund
A group of investors
A corporation lending from its own balance sheet
In Ontario, the term private mortgage does not describe one standardized product. The rate, fees, term, payment structure, loan position, renewal provisions and enforcement terms can vary substantially.
FSRA describes private mortgages as short-term solutions that can carry higher rates, higher fees, shorter terms, interest-only payments and additional conditions. It identifies individual lenders, private companies and MICs as possible private-lending sources.
Classification: Ontario regulatory consumer guidance.
Source: Financial Services Regulatory Authority of Ontario.
Current status: Accessed July 23, 2026.
Material qualification: The mortgage commitment and registered charge—not the label “private”—determine the borrower’s legal obligations.
Who may arrange private mortgages in Ontario
An Ontario mortgage agent Level 2 may arrange mortgages with private individuals, MICs, syndicates and other non-institutional lenders. Mortgage brokers may also arrange these transactions. A Level 1 mortgage agent is restricted to specified institutional and approved lenders and cannot independently arrange ordinary private-lender transactions.
Where a brokerage recommends a mortgage, Ontario rules require suitability assessment and written disclosure of material risks, compensation, relationships and conflicts. Private mortgages therefore require more than obtaining a lender’s approval. The recommendation must be suitable for the borrower’s needs and circumstances.
Classification: Ontario licensing and mortgage-brokerage conduct requirements.
Regulator: FSRA.
Material qualification: The borrower should verify the brokerage and individual licence through FSRA.
The private-mortgage underwriting framework
A useful private-mortgage framework is:
Borrower × Property × Exit
The three elements are connected.
Subsection — Borrower
The lender may review:
Current income
Actual ability to make payments
Credit history
Cause of financial difficulty
Use of funds
Other liabilities
Experience with the property
Cooperation and disclosure
Ability to complete the proposed exit
Private lending may place less weight on a minimum credit score, but that does not mean the borrower is irrelevant.
Subsection — Property
The lender may consider:
Accepted value
Mortgage position
Combined LTV
Location
Property type
Condition
Legal use
Marketability
Occupancy
Existing mortgages and liens
Taxes and insurance
Cost and uncertainty of enforcement
Subsection — Exit
The exit identifies how the mortgage will be repaid at or before maturity.
Possible exits include:
Refinancing with an A lender
Refinancing with an alternative lender
Sale of the property
Sale of another property
Completion of construction
Return to employment
Completion of business or tax history
Payment from a documented settlement
Maturity of an investment
Receipt of contractually committed funds
FSRA considers a realistic exit strategy essential to private-mortgage suitability. A plan based only on future price appreciation or an unsupported hope that a bank will refinance the property is not a reliable exit.
What the underwriter is thinking
The private underwriter is asking:
Why did the institutional lender decline?
Is the problem temporary or permanent?
What does the borrower need the money for?
Can the borrower service the mortgage?
What is the accepted value—not merely the owner’s estimate?
How much debt ranks ahead of the proposed mortgage?
Is the property marketable?
What happens if the proposed exit is delayed?
How much equity remains after interest, fees and selling costs?
Does the borrower understand the maturity risk?
Is there a less expensive structure that would solve the same problem?
The strongest private files do not hide the borrower’s weakness. They explain it and show why the weakness can be corrected or managed.
First, second and third private mortgages
| Position | Security position | Typical use | Principal risk |
|---|---|---|---|
| Private first mortgage | First registered mortgage, subject to claims with legal priority | Full bank payout, purchase, construction, arrears rescue or commercial bridge | Replaces the entire first mortgage and may carry substantial cost |
| Private second mortgage | Registered behind an existing first mortgage | Temporary equity access, arrears, tax debt, tuition, business funding or debt restructuring | Second lender is paid after the first lender and prices that subordinate risk |
| Private third mortgage | Registered behind at least two prior secured facilities | Unusual short-term situations with strong remaining equity | Very narrow equity cushion, high enforcement uncertainty and limited lender appetite |
A third mortgage should not be assessed by looking only at the requested third-mortgage amount.
The lender considers:
Combined LTV = All prior secured balances + Proposed new mortgage ÷ Accepted property value × 100
The authorized limit of a prior HELOC may also matter, even where the line is not fully drawn.
Payment structures
Subsection — Interest-only mortgage
The monthly payment covers interest but does not reduce principal.
At maturity, the original principal remains due unless some amount has been voluntarily repaid.
Subsection — Amortizing private mortgage
The payment includes principal and interest.
This may help reduce the balance but normally requires a higher monthly payment than an interest-only structure.
Subsection — Prepaid-interest mortgage
Some or all scheduled interest is deducted from the advance or reserved from the mortgage proceeds.
The borrower may have no ordinary monthly payment during the prepaid period, but:
The interest is still being paid
Net proceeds are lower
The gross mortgage may be larger
Maturity still arrives
The borrower may have less equity remaining
FSRA warns that some private structures have no regular payment while interest and fees are added or accounted for when the mortgage becomes due.
Subsection — Open and closed mortgages
An open private mortgage may permit repayment without an ordinary prepayment penalty.
A closed private mortgage may impose:
Minimum interest
Three months’ interest
Interest for the remaining term
Another contractually defined charge
The specific commitment controls.
Private-mortgage costs
Potential costs include:
Interest
Lender fee
Brokerage fee
Borrower’s legal fee
Lender’s legal fee
Appraisal
Title insurance
Administration fee
Discharge fee
Renewal fee
Extension fee
NSF or late-payment charges
Default interest
Inspection or draw fees for construction
Prepayment charge
Property-tax or insurance advances made by the lender
Ontario brokerages must disclose compensation, cost of borrowing and material risks in writing. Ordinary mortgage terms alone are not considered sufficient disclosure of all material risks.
Worked private-mortgage cost example
Assumptions
Gross private mortgage: $400,000
Term: 12 months
Interest rate: 10%
Interest prepaid for the full term
Lender fee: 2%
Brokerage fee: 1%
Combined legal and appraisal costs: $4,000
No principal is repaid during the term
No renewal, default or discharge charge is included
Figures are illustrative and do not represent a lender quotation
Variables
GM = Gross mortgage
I = Prepaid interest
LF = Lender fee
BF = Brokerage fee
C = Legal and appraisal costs
NP = Net proceeds
TC = Total stated borrowing cost
Interest
I = Gross mortgage × Annual interest rate
I = $400,000 × 10%
I = $40,000
Lender fee
LF = $400,000 × 2%
LF = $8,000
Brokerage fee
BF = $400,000 × 1%
BF = $4,000
Net proceeds
NP = Gross mortgage − Interest − Lender fee − Brokerage fee − Other costs
NP = $400,000 − $40,000 − $8,000 − $4,000 − $4,000
NP = $344,000
Total stated cost
TC = $40,000 + $8,000 + $4,000 + $4,000
TC = $56,000
Simple cost relative to usable proceeds
Simple cost ratio = Total stated cost ÷ Net proceeds × 100
Simple cost ratio = $56,000 ÷ $344,000 × 100
Simple cost ratio = 16.28%
Result
The borrower signs a $400,000 mortgage but receives approximately $344,000 of usable proceeds.
The borrower still owes the $400,000 principal at maturity.
Interpretation
The 10% contract rate does not describe the complete economics of the transaction.
The simple 16.28% ratio is not a regulated APR calculation. It is an illustration showing why borrowers must compare:
Gross mortgage
Net proceeds
Total term cost
Maturity balance
Renewal exposure
LTV, equity and property marketability
A private lender may be more property-focused than an institutional lender, but equity alone does not guarantee approval.
The lender may use the lower of:
Purchase price
Appraised value
Lender’s internal value
A discounted market value
A value reflecting incomplete construction or unusual use
A property may receive a lower acceptable LTV where it is:
Rural
Specialized
Mixed-use
Leasehold
Under construction
Poorly maintained
Difficult to insure
Dependent on an illegal use
Located in a thin resale market
A lender evaluating a power-of-sale recovery does not assume that the full appraisal value will be realized without cost or delay.
Private mortgage decision tree
Borrower cannot obtain ordinary institutional financing
↓
Is the obstacle temporary and identifiable?
No → Consider whether sale, downsizing, formal debt advice or another non-mortgage solution is more appropriate.
Yes → Continue.
↓
Is there sufficient verified property equity after every mortgage, fee and legal cost?
No → Private financing may not be feasible.
Yes → Continue.
↓
Can the borrower service the proposed structure, or is a properly disclosed prepaid structure supportable?
No → Approval may worsen the problem.
Yes → Continue.
↓
Is there a specific exit with a realistic date and contingency plan?
No → The private mortgage may be unsuitable.
Yes → Compare private first, private second, alternative lender, sale and other structures.
Exit strategies that can be tested
| Proposed exit | Evidence that strengthens it | Main risk |
|---|---|---|
| A-lender refinance | Current income, projected ratios, credit-repair plan and lender-policy analysis | The borrower may still fail institutional policy |
| B-lender refinance | Bank statements, business history, discharged proposal or improving credit | Higher-cost alternative lending may still be unavailable |
| Property sale | Current valuation, realistic listing period and net-sale calculation | Sale price or timing may disappoint |
| Construction completion | Budget, permits, remaining work and takeout-lender criteria | Cost overrun or failure to reach completion |
| Return to work | Employer confirmation, medical recovery and realistic return date | Return may be delayed |
| Settlement or judgment proceeds | Executed agreement, judgment and collection evidence | Funds may be delayed or uncollectable |
| Sale of another asset | Ownership, valuation and sale status | Market and closing risk |
| Business-income seasoning | Operating history, bank statements and expected tax filings | Business may not achieve projected income |
HopeWell case studies
Hamilton tuition bridge: preserve the low-rate first mortgage
Hamilton homeowners needed urgent funds for their child’s university tuition. Their first mortgage carried a very low fixed rate and a substantial break penalty. The husband was temporarily laid off, preventing an institutional second mortgage or HELOC at that time.
A fully prepaid private second mortgage preserved the first mortgage and reduced immediate monthly-payment pressure.
The intended exit was tied to:
The first mortgage reaching renewal
The husband returning to employment
A future full refinance review
The underwriting lesson: A private second mortgage can be more suitable than refinancing an entire low-rate first mortgage when the need is temporary and the exit is linked to identifiable events.
Cambridge CRA liability and active consumer proposal
Cambridge homeowners had strong household income but faced a large CRA liability and an active consumer proposal.
Neither the income alone nor a partial payout solved the file. The proposed mortgage needed to address:
Existing first mortgage
CRA liability
Consumer proposal
A private first mortgage consolidated all three obstacles into one short-term structure.
The underwriting lesson: High income does not overcome a tax liability and active proposal when those obligations prevent institutional financing. The private mortgage must clear the barriers required for a future institutional exit.
Cambridge self-renovation on a free-and-clear property
A Cambridge homeowner was self-managing a major renovation on a free-and-clear residential property.
The equity strengthened the collateral, but institutional construction lenders remained concerned about:
Completion risk
Self-managed work
Budget
Permits
Contractor oversight
Final value
A private construction mortgage was arranged to complete the property, with an intended conventional refinance after completion.
The underwriting lesson: Free-and-clear ownership reduces leverage risk but does not remove construction risk. The private loan is justified only where completion creates a more financeable property.
Oakville power-of-sale rescue supported by a documented judgment
Oakville homeowners facing power of sale had limited immediate income and approximately 80% LTV.
The proposed exit was not based solely on equity or optimism. The husband had obtained an approximately £6 million UK court judgment and expected to realize proceeds. A copy of the judgment was provided to the lender.
The underwriting lesson: Hardship explains why default occurred, but a lender still needs a documented material change or repayment source. An exit based on a judgment must be assessed for timing and collectability.
Aurora private-to-A refinance
Self-employed Aurora borrowers had remained in private financing for almost two and a half years because their personal reported income appeared insufficient.
A new review considered:
Personal income
Dividends
Corporate financial statements
Corporate NIAT
Lender-specific corporate-income policy
An A-lender refinance became possible after eligible corporate income was correctly analyzed.
The underwriting lesson: A private mortgage should not be renewed repeatedly without re-underwriting the original institutional obstacle.
Why private mortgages fail
A private mortgage usually fails for one of two broad reasons:
The problem it was intended to solve was not actually temporary.
The exit depended on an event that was never verified or achieved.
Subsection — Repeated renewals
Renewal can add:
New lender fees
Brokerage fees
Legal costs
Capitalized interest
Extension charges
Where no principal is being reduced, the mortgage may grow while equity falls.
FSRA illustrates how repeated interest-only private renewals can consume equity through interest and added fees, eventually forcing a sale when the lender declines another renewal.
Subsection — No measurable exit
“Credit will improve” is incomplete.
A measurable plan should identify:
Current score and credit defects
Debts to be paid
Required payment history
Income documentation needed
Expected lender category
Target LTV
Review date
Subsection — Declining property value
A refinance or sale exit may fail when:
Appraisal declines
Mortgage balance increases
Selling costs consume equity
Property condition worsens
Local marketability weakens
Subsection — Worsening borrower circumstances
The borrower may experience:
Further missed payments
Job loss
New debt
Failed business
Unpaid taxes
Insurance lapse
Construction overrun
Subsection — Unrealistic refinancing assumptions
A private lender’s approval does not mean a bank will later accept:
The income
The property
The requested amortization
The credit history
The final LTV
The occupancy or use
Subsection — Exit considered too late
A refinance may require:
Completed tax filings
Credit rebuilding
Appraisal
Construction completion
Lender review
Legal discharge
Beginning this work two weeks before maturity can leave no realistic replacement option.
Common reasons files fail
No credible exit strategy
Exit based only on future appreciation
Borrower cannot service even the interest
Property value is overstated
Combined LTV leaves no enforcement cushion
Fees and prepaid interest are not included in the equity calculation
Prior mortgages or liens are missing
Property taxes or insurance are unpaid
Construction budget is incomplete
Borrower expects automatic renewal
Institutional exit criteria were never tested
Credit or income deteriorates during the term
Sale is delayed until equity is nearly exhausted
Material facts are omitted from the application
Important warning
A private-mortgage renewal is not a harmless administrative extension.
FSRA treats a negotiated private renewal as a new transaction requiring renewed suitability assessment, due diligence and disclosure. A new renewal fee, rate or term may materially change whether the mortgage remains suitable.
Pattern we see
Across HopeWell’s private-mortgage cases, the strongest exits usually involve a concrete change:
Construction becomes complete
Employment resumes
A proposal or tax debt is paid
Bank-statement history becomes available
Corporate income is properly documented
A low-rate first mortgage reaches renewal
A property or other asset is sold
The weakest exits depend on the passage of time alone.
Time does not repair a mortgage file unless something measurable changes during that time.
If You Remember Only Three Things
Private underwriting is based on the borrower, property and exit—not the credit score alone.
The contract rate is only one part of the cost; fees, prepaid interest, legal expenses and renewal risk can materially reduce equity.
A private mortgage is suitable only when it solves a defined problem and leaves a realistic route to lower-cost financing, repayment or sale.