If you are researching a private mortgage works, here is what matters most before you apply.
Quick Facts
- People with damaged or limited credit
- Self-employed Canadians
- People in transition
- Non-standard properties
- Investors and quick-close buyers
Private Mortgage Works: What to Know
You found the house. You have a down payment. And then the bank — or maybe even a few banks — looked at your application and said no. Maybe it’s your credit score. Maybe you’re self-employed and your income looks messy on paper. Maybe the property type doesn’t fit their box. Whatever the reason, you’re stuck — and it feels like the dream is over.
It isn’t. A private mortgage is a real, legal, and increasingly common solution that thousands of Canadians use every year to get into a home, buy time, or bridge a financial gap. This guide explains exactly what a private mortgage is, who offers them, who qualifies, what they cost, and what to do when it makes sense — and when it doesn’t.
So… What Exactly Is a Private Mortgage?
A private mortgage is a loan secured against real estate — just like a regular mortgage — but funded by a private individual or company rather than a chartered bank or credit union. The lender might be a wealthy individual, a mortgage investment corporation (MIC), a syndicate of investors, or a private lending fund.
Because private lenders are not regulated by the Office of the Superintendent of Financial Institutions (OSFI) the same way banks are, they set their own rules. That’s the trade-off: they’re more flexible, but they’re also more expensive.
In Canada, the private lending market has grown significantly as bank qualification requirements have tightened. According to CMHC’s housing market research, alternative and private mortgage financing now accounts for a meaningful share of all new originations — particularly in high-cost markets like Toronto and Vancouver.
Key distinction: Private mortgages are primarily asset-based loans. The lender cares most about the property’s value and how much equity you have — not your credit score or income statement.
A-Lenders (Big Banks)
Strict income, credit, and stress-test requirements. Best rates, but tightest qualification rules.
B-Lenders (Trust Companies, Monolines)
More flexible than banks but still regulated by OSFI. Higher rates, but broader acceptance criteria.
Private Lenders (MICs, Individuals)
Widest flexibility. Focus on property equity over borrower financials. Highest rates in exchange for access.
Who Uses a Private Mortgage? (You Might Be Surprised)
Private mortgages are not just for people in financial trouble. They’re a strategic tool used by a wide range of Canadians — from first-time buyers who don’t fit the bank mold, to experienced investors moving quickly on a deal.
- People with damaged or limited credit: A past bankruptcy, consumer proposal, or missed payments can close bank doors for years. A private lender focuses on your equity, not your credit history.
- Self-employed Canadians: If you write off business expenses, your “income” on paper may look too low to qualify through traditional channels — even if your cash flow is strong.
- People in transition: New immigrants, recently divorced individuals, or Canadians between jobs who need bridge financing while their situation stabilizes.
- Non-standard properties: Rural properties, large acreage, commercial-residential mixed use, or homes needing major repairs often don’t qualify for insured lending.
- Investors and quick-close buyers: Private lenders can often fund in days, not weeks — essential when a deal has a tight closing window.
The key question private lenders ask: If you stopped making payments and they had to sell the property, could they recover their money? If there’s enough equity in the property to answer “yes,” many private lenders will work with you, regardless of your financial history.
How a Private Mortgage Actually Works
The mechanics are similar to any mortgage — you borrow money, you give the lender a registered charge (lien) against your property as security, and you make regular payments. But there are some important differences to understand.
| Feature | Bank Mortgage | B-Lender | Private Lender |
|---|
| Qualification focus | Income + credit | Income + credit | Property equity |
| Stress test required | Yes | Yes | No |
| Typical rate | 5–7% | 6–9% | 9–15%+ |
| Typical term | 1–5 years | 1–3 years | 6 months–2 years |
| Approval speed | Weeks | Days–weeks | Hours–days |
| Lender fees | None / minimal | 0.5–1% | 1–3% of loan |
| Prepayment flexibility | Limited | Moderate | Often open |
One significant advantage: most private mortgages in Canada are open, meaning you can pay them off early without penalty. This matters because private mortgages are almost always intended as short-term solutions — the plan is to improve your situation and refinance to a traditional lender within 12–24 months.
Rule of thumb: Most private lenders will lend up to 75–80% loan-to-value (LTV) on a residential property. The more equity you have, the better your rate and terms will be. Properties in major urban centres like Toronto, Vancouver, Calgary, and Ottawa tend to get better treatment due to stronger resale values.
What Does a Private Mortgage Cost? (The Honest Breakdown)
This is where people sometimes get a surprise — and where working with a mortgage broker is especially valuable, because they can help you compare the full cost of all your options, not just the interest rate headline.
Private mortgages carry higher rates than traditional financing. That’s the honest truth. But here’s the full picture of what you’ll typically encounter:
- Interest rate: 9–15%+: Rates vary widely depending on the property, your equity position, credit history, and the lender. First mortgages are cheaper than second mortgages (which carry more lender risk).
- Lender fee: 1–3% of the mortgage amount: This is charged by the private lender for setting up the loan. On a $400,000 mortgage, that’s $4,000–$12,000, often added to the mortgage balance.
- Broker fee: 1–2% (sometimes): When a broker places a private mortgage, they may charge the borrower a fee in addition to lender compensation. Always ask upfront so there are no surprises.
- Legal fees: $1,500–$2,500: Both you and the lender need independent legal representation to register the mortgage. Budget for both sets of legal costs.
- Appraisal: $300–$600: Private lenders almost always require an independent appraisal to confirm the property’s value. This is how they establish their security.
Think of it as a short-term bridge, not a long-term plan: Yes, a private mortgage at 12% costs more than a bank mortgage at 5.5%. But compare that to the alternative: not buying the home at all, losing your deposit, or missing a property that will gain in value. The question isn’t “is it expensive?” — it’s “is the cost worth what I get in return, and do I have an exit plan?”
The Financial Consumer Agency of Canada (FCAC) has tools to help you calculate mortgage costs and compare total borrowing expenses across different scenarios — worth a look before you commit.
The Honest Pros and Cons
Private mortgages are a legitimate tool — but they’re not right for every situation. Here’s a straightforward look at both sides.
Benefits
- Qualify when banks say no
- No mortgage stress test
- Approval in days, not weeks
- Often open — pay off early without penalty
- Any property type considered
- Can help you rebuild credit with on-time payments
- Buys time to fix your situation
Drawbacks
- Significantly higher interest rates
- Upfront lender and broker fees
- Short terms — you’ll need to refinance
- Less consumer protection than regulated lenders
- Equity requirement — not for low-down-payment buyers
- Renewal not guaranteed at term end
- Less standardized — terms vary widely by lender
Important reminder: In Canada, mortgage brokers dealing with private lenders must be licensed through provincial regulators like
FSRA in Ontario or equivalent bodies in other provinces. Always verify your broker’s licence before proceeding.
Private Mortgages as a Second Mortgage: A Common Use Case
One of the most common ways Canadians use private lending is as a second mortgage — borrowing against the equity in a home you already own, while your existing first mortgage stays in place. This is particularly useful for debt consolidation, home renovations, or accessing cash quickly without breaking your current mortgage (and paying its penalties).
According to Bank of Canada data on credit conditions, home equity access has become a key financial tool for Canadian households — and for those who don’t qualify for a HELOC (Home Equity Line of Credit), a private second mortgage can serve a similar purpose.
Second mortgage vs. refinance, which makes sense? If breaking your first mortgage would cost $10,000+ in penalties, a private second mortgage at a higher rate might still be cheaper overall. A good broker will crunch both scenarios and show you the math before you commit to anything.
Lender priority matters: Second mortgage lenders are in “second position” — if you default and the property sells, the first mortgage gets paid first. This higher risk is why second mortgage rates are typically 2–4% higher than first mortgage private rates.
The Most Important Part: Your Exit Strategy
A private mortgage without an exit strategy is a financial risk. Before you sign anything, you need a clear plan for how you’ll get out of the private mortgage and into something better — typically within 12–24 months.
Here are the most common exit strategies Canadians use:
- Rebuild your credit score: Make every payment on time. Pay down credit card balances. Dispute errors on your credit report. After 12–18 months, many borrowers qualify for B-lender or even A-lender rates.
- Establish 2 years of income history: If you’re new to Canada or newly self-employed, the two-year history requirement for banks is a real thing. Use the private mortgage term to build that track record.
- Let the property appreciate: In rising markets, your LTV improves naturally as the home value increases, making you a better candidate for traditional financing at renewal time.
- Sell the property: Sometimes the exit strategy is simply selling. Private financing buys you time to get the home in shape, wait for better market conditions, or complete the purchase before selling another property.
Canadian credit bureaus — Equifax and TransUnion — typically require 12–24 months of positive payment history to meaningfully improve a damaged credit file. Your broker should help you map this timeline before you commit to any private mortgage.
Frequently Asked Questions
Can I get a private mortgage with very bad credit or after a bankruptcy?+
Yes — in many cases. Private lenders are focused on the property’s value and your equity, not your credit history. After a bankruptcy or consumer proposal is discharged, you may still qualify for a private mortgage depending on how much equity you have and how long ago the bankruptcy occurred.
Do I need to pass the mortgage stress test for a private mortgage?+
No. The federal mortgage stress test applies to lenders regulated under the Bank Act, such as chartered banks and federally regulated trust companies. Private lenders are provincially regulated (or sometimes unregulated entirely) and are not required to apply the stress test.
How quickly can a private mortgage be arranged?+
Private mortgages can often be approved and funded within 3–7 business days — sometimes even faster in straightforward cases. Because the underwriting process is simpler, the timeline is significantly shorter than a bank mortgage, which can take 2–4 weeks.
Will a private mortgage hurt my credit score?+
The mortgage application itself may result in a credit inquiry, which has a small short-term impact. However, making on-time payments on a private mortgage can actually help rebuild your credit score over time.
Can I make extra payments or pay off my private mortgage early?+
Most private mortgages in Canada are “open” — meaning you can pay them down or pay them off entirely at any time without penalty. However, terms do vary by lender, so always confirm prepayment conditions before signing.
What happens if the private lender doesn’t renew my mortgage at the end of the term?+
This is a real risk, and it’s exactly why having an exit strategy is so important. Private lenders are not obligated to renew. If your situation hasn’t improved enough, you may need to find another private lender or sell the property.
Your Step-by-Step Action Plan
If you think a private mortgage might be the right move, here’s exactly what to do next.
1. Talk to a licensed mortgage broker first
Before approaching any lender directly, speak with a broker who works in the alternative and private space. They’ll review your full picture and tell you honestly whether private lending is your best path or whether a B-lender might get you there for less.
2. Get a clear sense of your property’s value
Private lending is equity-based, so your home’s market value is the foundation of everything. Your broker can help you get a reliable estimate early on so you know how much you might be able to borrow and at what terms.
3. Pull your own credit report and review it
Order a free copy of your credit report from both Equifax and TransUnion (you can do this through the FCAC’s tools at canada.ca). Look for errors and understand where you stand before a lender pulls it.
4. Define your exit strategy before you sign
Ask yourself and your broker: what will change in the next 12–24 months that will allow you to move to a traditional lender? More stable income? Better credit score? More equity? Have a concrete plan, not just a hope.
5. Review the full cost, not just the rate
Ask for a complete breakdown of all fees — lender fees, broker fees, legal costs, and appraisal costs — before you agree to anything. A good broker will walk through all of this transparently.
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