Private Mortgage Fees and Closing Costs

A private mortgage can involve contract interest plus a lender fee, brokerage fee, appraisal, borrower legal bill, lender legal bill where payable by the borrower under the commitment, registration or title costs, existing-lender payout/discharge costs and other transaction-specific expenses. During the term there can also be default, late-payment, property-tax, insurance or administration charges depending on the contract.

At renewal or extension, another fee, appraisal or legal cost may arise. FSRA has specifically warned that obscured renewal fees can make it difficult for borrowers to plan a viable exit.

A lender fee is separate from interest. It may be expressed as a percentage of the mortgage or a fixed amount and may vary with risk, mortgage position, property, term and transaction complexity. The fee should be identified clearly so the borrower knows who receives it and how it affects proceeds.

A 2% lender fee on a $250,000 mortgage is $5,000. If it is deducted at closing, the borrower receives $5,000 less cash. If it is added to the debt, the borrower may pay interest on a larger balance.

A brokerage fee is compensation payable to the licensed mortgage brokerage for its services. FSRA requires applicable brokerage fees and remuneration to be disclosed in writing, and fees cannot be paid directly to the individual broker or agent.

For mortgages with a principal amount of $400,000 or less, Ontario rules prohibit a brokerage from requiring or accepting an advance payment or deposit for services or expenses before closing. FSRA explains that an upfront retainer may be charged for loans above $400,000, subject to the rules and disclosure requirements.

A private mortgage closing commonly involves legal work for the borrower and separate work for the private lender. The borrower’s own lawyer advises on the borrower’s interests and signs or registers the required closing documents. The lender’s lawyer protects the lender’s security, reviews title and prepares or reviews the lender’s mortgage documentation.

Many private mortgage commitments require the borrower to pay the lender’s reasonable legal costs in addition to the borrower’s own legal bill. That is common practice, not a universal rule created by the word “private.” The actual obligation comes from the commitment and mortgage documents, so the borrower should obtain the expected legal-cost treatment before signing.

Private lenders often require an appraisal or another acceptable valuation. The borrower commonly pays for it because the lender needs independent support for value, property condition and marketability. A rush appraisal, specialized property or commercial-style report can cost more than a standard residential valuation.

An appraisal fee is economically important even if it is not financed. If the value comes in lower than expected and the mortgage cannot proceed, the valuation expense may still have been incurred.

The gross mortgage amount is not necessarily the amount available to the borrower. Payouts of existing mortgages, arrears, taxes and other liens can consume most of the advance before new cash is released. Fees and legal costs can reduce it further.

A borrower consolidating debt should therefore compare the net proceeds available for the intended purpose with the full new secured debt. A mortgage that is large enough on paper can still fail to solve the cash need after all required deductions are applied.

Assume a hypothetical $250,000 private mortgage with a 10% interest-only rate for 12 months, a 2% lender fee, a 1% brokerage fee, $2,500 of lender legal costs, $1,800 of borrower legal costs and a $700 appraisal. This is a cash-flow illustration, not a statutory APR calculation and not a quote.

The lender fee is $5,000 and the brokerage fee is $2,500. Total listed transaction costs are $12,500. If all were paid from the advance, $237,500 would remain before paying any existing mortgages or debts. Interest for the year on a $250,000 interest-only balance at 10% is $25,000, and the principal would still be $250,000 at maturity if no principal payments were required.

If a fee is added to the mortgage rather than paid in cash, the borrower avoids an immediate cash outlay but increases secured debt. The borrower can then pay interest on that financed amount and must repay it at maturity or on discharge.

This can be useful where liquidity is the problem being solved, but it is not free. A repeated pattern of adding renewal fees to the balance can cause the mortgage to grow even when no payment is missed.

Some private mortgages deduct several months of interest upfront or create an interest reserve within the loan. This can reduce or eliminate monthly payments for a period, which may be useful during construction, temporary unemployment or another planned transition.

The economic test is whether the reserve is funded from the borrower’s equity and whether enough proceeds remain for the original purpose. The borrower should understand whether interest is calculated on the full mortgage amount, including the reserve, and what balance remains due at maturity.

Ontario’s cost-of-borrowing rules require a written disclosure statement and govern how APR is calculated for covered mortgage brokerage transactions. APR helps convert certain borrowing charges into a comparable annualized measure, but it should not replace a transaction-level review.

A borrower should still know who receives each fee, which costs are paid in cash, which are deducted or financed, what is excluded from APR under the applicable rules, and what amount must be paid to discharge the mortgage.

A one-year mortgage that renews for another year may generate a fresh lender or brokerage fee, new legal expenses, an updated appraisal and a different rate. If those costs are capitalized, the principal can increase while an interest-only payment still reduces none of the original debt.

FSRA’s consumer example illustrates how repeated private renewals and added fees can leave a borrower with a larger mortgage and less equity even after years of making substantial interest payments. The correct renewal comparison is therefore “What will my debt and equity look like after another term?”

Two private mortgage offers should be compared using the same requested net cash and the same expected holding period. A lower rate with a larger fee can be more expensive than a higher rate with a smaller fee, especially on a short term. Open prepayment can also be worth more than a small rate difference if the borrower expects an early exit.

The useful comparison set includes net proceeds, monthly payment, known term interest, all fees, prepayment cost, renewal assumptions, legal and appraisal requirements and expected payout at the planned exit date.