Private mortgage: Everything you need to know

Updated: Oct 24, 2024

With the increase in the demand for affordable mortgage in Canada, aspiring home buyers are turning to alternative solutions. Those who do not qualify for traditional mortgages offered by banks, credit unions, and other mortgage lenders turn to private home loan providers. The same goes for borrowers with poor credit histories.

Applying for a private mortgage might be a good idea especially if you cannot meet the requirements set by mortgage companies. But with higher interest rates plus additional fees, along with potentially harsher penalties, this type of mortgage might not be for everyone. A private mortgage is mostly for people who want to own property but are at risk of getting rejected by common lending institutions.

To help you learn about this mortgage option, Canadian Mortgage Professional will discuss everything you need to know about private mortgages. We will shed light on what they are and how they work as well as the right time to get a private mortgage. We will also cover the advantages and disadvantages of this home loan option. Want to know the risk involved when you apply for a private mortgage? Read on for more.

This is another one of our client education pieces. To mortgage professionals who are our usual readers, feel free to share this with clients who are interested in securing a private mortgage.

What is a private mortgage in Canada?

A private mortgage is an interest-only, short-term loan that you use to purchase a home. This type of mortgage can be an easier option to qualify for. This is because they are offered by private mortgage lenders who are also considered as independent lenders.

Private mortgages are similar to subprime mortgages. Both mortgage types are beneficial for anyone who cannot secure traditional home loans from commercial banks and other lending institutions.

Private mortgages are lenient

Because there is a better chance that private lenders will view your mortgage in terms of investment, they are less strict about background checks and credit history than traditional lenders. Securing a private mortgage could make more sense if:

• you are purchasing a unique property
• you have a non-traditional source of income
• you do not plan to own the home for the long term

As shorter-term loans, private mortgages generally have amortization periods that last as little as six months. They can also last as long as three years. Borrowers typically find themselves in better positions to apply for a mortgage from a bank or other traditional lenders after making on-time payments throughout the private mortgage term.

How does a private mortgage work?

A private mortgage is offered by mortgage investment corporations, individuals, and syndicates. Interest rates for private mortgages are usually much pricier than the more common mortgage choices in Canada. It is unsurprising for these rates to be higher because the payments that you must make on private mortgage loans are interest only.

In other words, none of your payments go to the principal since this is an interest-only mortgage. This also means that, unlike a standard mortgage, the total amount that you owe does not lessen over time.

Requirements for a private mortgage

When applying for a private mortgage, you will be required to meet certain requirements. Still, it is often faster and easier than qualifying for a traditional mortgage. Some of the requirements you will need to qualify for a private mortgage include: 

1. Sellable property

Your property should be evaluated as sellable. If you default on your payments, your private mortgage lender will need to ensure they can possess and possibly re-sell your home to get their investment back.

2. Down payment

Do you need a down payment for a private mortgage? Absolutely. Like any other mortgage types offered in Canada, private mortgage lenders require a deposit. The minimum down payment that you will need for a private mortgage is usually at least 15% of the purchase price.

3. Proof of income

You will need to prove that you have the income required to make your mortgage payments. This can get tricky for those who are self-employed. In those cases, you will likely need to provide extra documents as evidence of your primary source of funds.

For more information about income requirements for mortgage applications, read this article on what home buyers should know about proof on income.

When is the right time to get a private mortgage?

Compared to traditional mortgage loans, a private mortgage can have higher mortgage rates and fees. It can also be limited to a shorter amortization period. To decide whether it is time for you to get a private mortgage, consider the following factors:

• You are crunched for time and need the money more quickly than you would get it with a traditional lender’s approval process.
• A traditional lender will not approve you for a mortgage if you have bad credit history. If you did get approved, it might not be enough to secure your property.
• Until you can get the money from a traditional lender, you need a short-term loan.

Traditional mortgage lenders might refuse to finance you for the unconventional home you want to buy, such as:

• inherited home that needs work
• a fixer-upper
• a commercial property

In these cases, you should go for private mortgages. Watch this video to help you decide when you should get one:

Once you have made the decision to apply for a private mortgage, your mortgage broker should contact private lenders that offer competitive home loans. They should also look for three important factors:

• turnaround time
• flexibility
• transparency

What are private lenders?

A private lender is an individual or business that lends money but is not part of a commercial bank, credit union, or other lending company. Private lenders often have more flexible terms than traditional lenders, making it easier to get a home loan.

However, it is important to clearly understand the terms and risks involved when securing a private mortgage with a private lender. Private home loans can often come with higher interest rates or less legal protection. Try to consider other alternatives before immediately searching for a private lender.

But if you are certain about contacting one, you can either research on your own or rely on the expertise of an experienced mortgage broker. These professionals are knowledgeable about the ins and outs of the industry and will help connect you with a trusted private lender. Got no idea where to find the right mortgage broker for you? You can check our Best in Mortgage page.

How private lenders’ mortgage offerings work

Private mortgages work like common mortgage products offered by traditional mortgage lenders such as commercial banks and credit unions. Once your mortgage application is approved, you will be provided with financing to purchase your chosen property or spend it on home improvements.

Check out this video on how private mortgage lenders work in the country:

What are the risks involved in private mortgages?

A private mortgage can be a viable option for aspiring home buyers who are unable to secure a traditional home loan from banks or mortgage lenders. If you want to apply for one, you should consider some of these risks:

• higher mortgage rates
• limited mortgage terms
• foreclosure
• interest-only payments
• added expenses

Let us discuss these risks when applying for private mortgages below:

1. Higher mortgage rates

It is not uncommon for private mortgage lenders to impose higher mortgage rates for their private mortgage offerings. This is because home loan borrowers who have successfully applied for this mortgage are seen as high risk in terms of defaulting. Check out this video about private mortgage rates in Canada:

2. Limited mortgage terms

The terms for private mortgages are often shorter than their traditional home loan counterparts. Some private mortgage lenders will market their services with a one-year limit or two. With this, if you are unable to get bank financing once your private mortgage renews, you are at risk of ending up in a cycle of expensive mortgages with limited terms.

With most mortgage products in Canada, home loan applicants can either be accepted or rejected based on their ability to pay off the mortgage first and the property value. With private mortgages, you can secure a home loan based on the property value first. Your ability to repay the mortgage is not the primary indicator of the private lenders’ decision-making.

3. Foreclosure

Private mortgage lenders can move faster than commercial banks in foreclosing your home if you miss mortgage payments. This means that if you face financial difficulties and do not keep up with your payments, they might take action sooner than expected.

Would you like to know what will happen if you default on your mortgage? Watch this clip:

4. Interest-only payments

In private mortgages, repayment terms can be for the interest only. With this type of property loan, your monthly payments only cover the interest, not the entire mortgage amount itself. This means that at the end of the home loan term, you still owe the full amount borrowed. In the end, it will leave you no closer to paying it off.

5. Added expenses

Finally, securing a private mortgage can have a risk of incurring added expenses. Private mortgage lenders can ask for higher fees. This is separate from the administrative costs and legal charges.

Are private mortgages cheaper?

Not necessarily. Private mortgages might be an attractive option for those who are unable to meet the requirements set by traditional mortgage providers. Still, it does not make them less expensive. In fact, private mortgages can be costlier than the usual home loans due to higher mortgage rates.

It is also not beneficial in the long run since you would need to prepare for a big amount to pay your entire mortgage when the term ends. This is because of the interest-only repayments set by private mortgage lenders for this type of mortgage.

Advantages of private mortgages

While useful for some potential homebuyers, private mortgages might not be for everybody. Some advantages of private mortgages include:

• quicker mortgage approval process
• open to anyone who does not have traditional sources of income
• suitable for anyone with low (or even poor) credit history

Are you aware about the right credit score that potential borrowers must have to buy a house in Canada? Read this article.

Disadvantages of private mortgages

On the other hand, disadvantages of private mortgages include:

• high interest rates
• added fees for commissions
• extra charges for setup
• risky repayment terms

Private mortgages can have repayment terms that do not include paying the mortgage itself—only the interest. You can also face harsh penalties if you fall behind on your payments. This is because private mortgage lenders foreclose on properties faster than traditional lenders.

Since private mortgage lenders are not licensed, you cannot be sure they have the same experience, education, and licences as traditional mortgage lenders. So, if you are unsure about private mortgages, go for the traditional ones. You can also choose from among the best mortgage lenders in Canada to find the most suitable mortgage type for your home loan needs.

Is it hard to get a private mortgage?

Getting a private mortgage in Canada can vary in difficulty depending on the complexity of your situation. Still, it is worth considering especially since private mortgage lenders often have fewer requirements than traditional ones. They do not require a perfect credit score, making it easier for potential borrowers to qualify.

All in all, while it can be easier to secure a private mortgage, it is helpful for you to understand the potential risks and disadvantages involved. If you think that these outweigh the benefits, then applying for a private mortgage is not for you.

On the contrary, if traditional mortgage providers cannot help you with your homeownership goals, then securing a private mortgage might be the answer.

Would you consider applying for a private mortgage in Canada? Share your insights in the comment section below.