The Pros and Cons of Private Mortgages
 Posted on: 2025-12-08

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Struggling to get a mortgage through your regular bank? You’re not the only one. Banks have tightened their lending rules, so many Canadians are looking at other options. One of those is a private mortgage. But what exactly is it, and could it be the right option for you?

This guide explains what a private mortgage is, when it’s used, the pros and cons of private mortgage financing, typical costs, and how it compares with bank lending. We’ll also cover the private mortgage approval process, key risks, and whether it fits investors.

What Are Private Mortgages?

A private mortgage arrangement in Canada is a home loan made by individuals, mortgage investment corporations (MICs), or private lending firms, instead of deposit-taking banks or credit unions. In simple words, it is real estate financing that is more or less based on property value and any equity available, granted typically for shorter terms with pricing commensurate with a greater risk. Private mortgages have gained favour as mainstream underwriting standards became more stringent and documentation requirements rose, and closing times started competing aggressively for business, especially in top Canadian markets.

Private loans are often used as temporary solutions: interest-only payments, terms from 6-24 months, and a clear path to refinance into lower-cost bank or monoline options. If you are new to the mortgage journey, our guide on understanding the mortgage approval process provides a helpful overview before you consider private financing.

When Do Borrowers Consider Private Mortgages?

Borrowers typically look to alternative mortgage lenders when traditional channels decline or delay files due to:

• Poor or thin credit history (late payments, collections, consumer proposals).
• Unverifiable or variable income (commissioned, gig, seasonal, or heavily expensed self-employed earnings).
• Recent bankruptcy or credit events that require seasoning before A/B lenders will consider an application.
• Unique properties (rural, mixed-use, significant deferred maintenance) that fall outside bank guidelines.
• Time-sensitive closings where bank processing times would jeopardize a purchase, bridge, or renovation schedule.

The private lender mortgage solution in Canada can also bridge short-term gaps, e.g., paying off tax arrears, consolidating high-interest debt to stabilize cash flow, or funding improvements before listing or refinancing. For entrepreneurs and freelancers, see our guide on how self-employed individuals qualify for a mortgage to understand documentation pathways that may help you qualify with mainstream lenders in the future.

Pros of Private Mortgages

Sometimes, the private mortgage can be the best option. Here’s what makes it attractive:

• Faster Decisions and Funding: Many files can be reviewed in days rather than weeks, which is critical for firm offers or expiring conditions.
• Flexible Underwriting: Private lenders can place more weight on equity, collateral, and the project’s viability (e.g., renovation scope and after-repair value) rather than rigid scorecards.
• Access for Credit-Challenged or Self-Employed Borrowers: Private loans can provide a “reset period” to demonstrate repayment discipline and prepare for bank financing.
• Problem-Solving in Time-Sensitive Scenarios: Useful for bridge financing, construction draws, or resolving temporary issues (e.g., tax arrears) that block bank approvals.
• Short-Term Tool for Rehabilitation: Use the term to implement a plan; pay down revolving debt, file up-to-date returns, or season new income, then refinance. For score recovery tactics, see our blog on how to improve your credit score for a mortgage.

These benefits illustrate the upside in the pros and cons of the private mortgage debate when you have a credible exit strategy.

Cons of Private Mortgages

Now, let’s explore the disadvantages of the private mortgage. It’s important to know the risks before you use it:

• Pricing Premium: Private mortgage rates are higher than bank rates to compensate for risk (often high single-digit to low-teens, file-dependent).
• Shorter Terms: Typical commitments run 6 months to 2 years, after which renewal or refinance is required.
• Higher Transactional Costs: Expect lender, broker, legal, and appraisal fees that increase your all-in borrowing cost.
• Stricter Default Remedies: Missed payments or maturity without repayment can escalate quickly toward enforcement.
• Exit Risk: Without a realistic refinance or sale plan, borrowers can become trapped in serial renewals.

To avoid costly missteps among the risks of private mortgages, review our guide on avoiding common mortgage mistakes before you sign.

Common Use Cases

Here are a few real-world examples of when private mortgages come in handy:

• Bridge Financing Between Sales: Cover the gap when your purchase closes before your sale funds or when a bank bridge is unavailable.
• Investors Leveraging Equity: Acquire, renovate, and stabilize a property where speed and flexibility create value, then refinance upon completion. For frameworks and scenario planning, see our blog on strategies for Investors.
• Debt Consolidation: Replace multiple high-interest obligations with a single mortgage payment to regain cash-flow control while you prepare for bank qualification.
• Seniors Accessing Equity: Private loans can serve as short-term equity access; however, many retirees also compare this route with a reverse mortgage for longer-term needs. Explore reverse mortgages for seniors to evaluate which option better matches your time horizon and risk tolerance.

So, is a private mortgage right for real estate investors? When the project timeline is short, the value-creation is clear (e.g., BRRRR (buy, rehab, rent, refinance, repeat) or flip), and the refinance math works even under conservative assumptions, yes. Proper underwriting, holdback structures for renovations, and contingency planning are essential.

Private Mortgage vs. Traditional Mortgage

If you are deciding how to access equity, this primer on the differences between a purchase mortgage and a refinance clarifies the process and cost implications for each path.

How to Qualify for a Private Mortgage

Even with flexible underwriting, the private mortgage approval process involves core requirements:

• Property Appraisal: Confirms market value and supports the loan-to-value (LTV) ratio; many private lenders cap LTV lower than banks.
• Proof of Income and Assets: Bank statements, notice of assessment (NOA)/T1s where available, corporate financials for business owners, and a realistic household budget.
• Down Payment or Equity: Purchases generally require 15-25% down; refinances typically require at least 20% equity, more for higher-risk files or unique properties.
• Purpose and Use of Funds: Clear documentation for renovations, debt consolidation, or bridge financing.
• Exit Strategy: A dated, evidence-based plan to refinance or sell (e.g., post-renovation appraisal target, two years of filed returns for self-employed, debt-to-income targets).

Well-prepared files with transparent documentation obtain better terms, fewer conditions, and faster funding.

What to Watch Out For: Red Flags

Safeguard yourself against common pitfalls in the risks of private mortgages category:

• Vague or Incomplete Term Sheets: Insist on written disclosure of rate, all fees (lender, broker, legal, appraisal, renewal, discharge), default interest, and prepayment options.
• No Independent Legal Advice: Retain your real-estate lawyer; never rely solely on a lender-recommended firm.
• Unrealistic Exit Plan: Stress-test for rate moves, appraisal shortfalls, and income variability; build a Plan B.
• Aggressive Enforcement Clauses: Understand grace periods, late charges, and timelines for power of sale/foreclosure.
• Pressure to Waive Due Diligence: Do not skip appraisal reviews, lien searches, or building inspections on unique properties.

If affordability is the main concern, explore potential supports on our financial assistance programs page that may reduce or eliminate the need for private borrowing.

Planning Your Exit Strategy

Most private mortgages carry one-year terms, sometimes extendable. A credible exit plan should include:

• Milestones and Dates: E.g., complete renovations by Month 6; achieve target rent by Month 8; file current-year returns by Month 10.
• Target Lender Profile: Identify whether your refinance destination is an A or B lender and what documentation they will require.
• Qualification Metrics: Target credit score, debt ratios, and LTV thresholds you must meet to switch.
• Liquidity planning: Account for discharge, legal, and appraisal costs at refinance; set aside reserves.
• Contingencies: If values or income underperform, consider partial pay-downs, co-signers, or an interim renewal.

If you’re wondering how to refinance a private mortgage, get advice from a licensed mortgage broker. They can help you understand your options and make sure the private mortgage is a good fit for your goals.

Should You Choose a Private Mortgage?

Think of a private mortgage as a tactical instrument, not a permanent residential dwelling. It is a time-sensitive opportunity to be deliberately exploited, used to get around a documentation hurdle, or to finance value-add work that bank lenders will be able to reward in the future. An ill-planned and unstructured private mortgage can become costly and stressful.

A private mortgage could be your best option if you need cash fast, are unable to qualify for a traditional mortgage, have a concrete plan to pay that mortgage back, and are aware of the high costs as well as the short terms. A licensed broker will be able to match you with the best private mortgage lenders in Canada, depending on your objectives, risk tolerance, and exit timeline.