Search for private mortgages and you will find two very different stories. One says they are a lifeline when the bank says no. The other says they are expensive traps. Both can be true, depending on the situation. A private mortgage is a tool: useful in the right circumstances, costly or harmful in the wrong ones.
This article is an honest look at both sides, so you can judge whether one fits your situation before anyone asks you to sign anything.
At a Glance
- Private mortgages lend mainly against your home’s equity, so they can help when bank rules do not fit
- They cost more than bank financing and usually have short terms
- They work best for problems that are temporary and have a clear way out
- They make things worse when the payment is unaffordable or there is no exit plan
- Total cost, an exit plan and independent legal advice are the three biggest safeguards
What makes a private mortgage different
Banks and most credit unions approve mortgages largely on income, debt ratios and credit history, within strict qualifying rules. Private lenders, usually individual investors or mortgage investment corporations, put more weight on the property: its value, how easy it would be to sell, and how much equity there is. That is why they can sometimes help people banks cannot.
The trade-off is cost and term. Private lenders take on more risk and charge for it, through a higher rate and fees, and they generally lend for a short period rather than for years.
When a private mortgage can make sense
Private financing tends to work when the underlying problem is temporary and there is a realistic plan to move on. For example:
- A renewal was declined because of a recent credit issue that will be resolved with a year of clean payments
- Arrears need to be cleared before a lender escalates, and the household budget can carry the new payment
- Income is real but hard to document, such as a new business that will have two years of tax returns soon
- A purchase must close before the current home sells
- A separation buyout where one spouse keeps the home and will refinance with a bank once the dust settles
- Consolidating expensive debt where the new payment is clearly lower and the debt will not come back
When a private mortgage is the wrong answer
It is just as important to recognise when private lending will make things worse:
- The payment is already unaffordable. A more expensive loan does not fix a budget that does not work.
- There is no exit. If you cannot explain how the loan will be repaid at the end of the term, you are likely to face repeated renewals and fees.
- The equity is thin. Borrowing close to the limit leaves no cushion if values dip or costs rise.
- It funds an ongoing shortfall. Borrowing against the house to cover monthly living costs only delays the problem.
- Other options have not been looked at, such as a B lender, a payment arrangement, selling on your own terms or advice from a licensed insolvency trustee.
The real risks
Cost
Fees and higher interest add up. As a purely hypothetical illustration: if someone borrowed $100,000 on an interest-only private mortgage and the rate were 10% a year, the interest alone would be about $833 a month. If a lender fee of 2% applied in that example, that would be another $2,000, usually taken from the advance. Actual rates and fees vary by lender, property and file, but the example shows why the cost has to be worth what it solves.
Short terms
When the term ends, the balance is due. Renewal is not automatic and usually costs another fee.
Your home is the security
As with any mortgage, if payments stop or the loan is not repaid, the lender can take legal steps to enforce it. In Alberta that happens through the courts, and it can end with the property being sold.
How to make a private mortgage safer
- Start with the exit. Write down how and when the loan will be repaid before you look at offers.
- Know the total cost. Add up interest and every fee, and look at the net amount you receive.
- Stress-test the payment. Make sure you can carry it with room to spare, and budget for the payout or a renewal fee.
- Read the prepayment and default terms. Know when you can pay out and what happens if something goes wrong.
- Use a licensed professional and your own lawyer. Check a brokerage’s licence with RECA and get independent legal advice.
Frequently Asked Questions
Are private mortgages legal in Alberta?+
Yes. Private mortgages are a normal part of the lending market. Anyone arranging mortgages for others in Alberta must be licensed by RECA, and the mortgage is registered on title like any other.
Will a private mortgage hurt my credit?+
The mortgage itself is not usually what affects your credit; missed payments are. Many private lenders do not report to the credit bureaus, so on-time payments may not help your score either, which is worth knowing if rebuilding credit is part of your exit plan.
Can I get out of a private mortgage early?+
It depends on the prepayment terms. Some are open after a minimum period, others charge a penalty or a minimum amount of interest. Check this before signing if you plan to refinance or sell early.
Is a B lender safer than a private lender?+
B lenders are regulated institutions with longer terms and typically lower costs than private lenders, so if you qualify, they are often the better choice. Private lending is usually for situations that fall outside B lender rules.
Not sure which side of the line you are on?
If you are weighing a private mortgage, NOW Mortgage can look at your situation honestly, including telling you when a private mortgage is not the right move. Use the form below to request a call back.