A private mortgage can provide access to financing when a bank or traditional lender is unable to approve an application. It may help a homeowner address an urgent financial problem, consolidate debt, complete renovations or obtain temporary financing while working toward a longer-term solution.

However, private mortgages generally have higher rates and fees than traditional mortgage products. They are usually intended to be a short-term financing tool rather than a permanent mortgage solution.

Before proceeding, homeowners should understand why they need the financing, whether the payments will be manageable and how the mortgage will eventually be repaid or replaced.

Private Mortgage Series

This is Part 1 of a three-part series on private mortgages in Ontario.

In this series, Robert Silipo of RS Mortgage Solutions explains:

  • When a private mortgage may make sense
  • What private mortgage rates, fees and costs may include
  • How to create a realistic private mortgage exit strategy

Part 1: When Does a Private Mortgage Make Sense in Ontario?
Part 2: Private Mortgage Rates, Fees and Costs in Ontario
Part 3: How to Get Out of a Private Mortgage: Building an Exit Plan

What Is a Private Mortgage?

A private mortgage is a loan secured against real estate and provided by an individual investor, a group of investors, a mortgage investment corporation or another non-bank lender.

Traditional lenders usually place substantial emphasis on credit, income and established lending guidelines. Private lenders may place more emphasis on:

  • The property’s value
  • The amount of equity available
  • The property’s location and condition
  • The total loan-to-value ratio
  • The requested mortgage amount
  • The purpose of the financing
  • The borrower’s repayment plan

Credit and income are still relevant, but they may be evaluated differently.

This can make private financing an option for homeowners who have sufficient property equity but cannot currently qualify with a bank or alternative lender.

Common Reasons Homeowners Consider Private Mortgages

Every mortgage situation is different, but private financing is often considered for the following reasons.

Credit Challenges

A homeowner may have difficulty qualifying because of missed payments, collections, high credit-card balances, a consumer proposal, bankruptcy or another financial setback.

A private lender may be more flexible when there is enough property equity and a reasonable plan for improving the borrower’s position.

Private financing may provide time to:

  • Bring accounts up to date
  • Pay down high-interest debt
  • Reduce credit utilization
  • Re-establish a positive payment history
  • Prepare for future refinancing

The important question is whether the mortgage will improve the homeowner’s situation or simply delay a larger financial problem.

Income That Is Difficult to Verify

Self-employed borrowers, business owners, commission-based employees and people with irregular income may not meet traditional income-verification requirements.

For example, a business owner may have strong cash flow but report lower taxable income because of legitimate business expenses. A recently self-employed person may not yet have the income history required by a traditional lender.

A private lender may focus more heavily on the property and available equity.

The borrower must still have enough income or resources to make the mortgage payments and maintain the property.

Mortgage or Property-Tax Arrears

Falling behind on mortgage payments or property taxes can quickly become an urgent situation.

Depending on the available equity, private financing may be used to:

  • Bring an existing mortgage up to date
  • Pay property-tax arrears
  • Cover certain legal or enforcement costs
  • Stop or delay a power-of-sale proceeding
  • Create time to refinance or sell the property

Taking on a more expensive mortgage without correcting the underlying cash-flow problem may make the situation worse.

The new financing should create a workable path forward rather than simply postpone the problem.

CRA Debt and Other Urgent Obligations

Some homeowners consider using property equity to address Canada Revenue Agency debt, liens, court judgments, business obligations or other urgent liabilities.

Private financing may provide access to funds when the matter is time-sensitive and traditional financing is unavailable.

Before proceeding, the homeowner should understand:

  • The total amount that must be paid
  • Whether any liens are registered against the property
  • Whether other debts will remain afterward
  • Whether the new mortgage payment is affordable
  • Whether the financing will fully address the problem

Replacing one debt with another only makes sense when the new arrangement creates a more manageable position.

Debt Consolidation

Private mortgage funds may be used to consolidate credit cards, unsecured lines of credit, personal loans or other high-payment debts.

Debt consolidation may help:

  • Reduce the number of monthly payments
  • Improve monthly cash flow
  • Bring overdue accounts up to date
  • Lower credit utilization
  • Create time to rebuild credit

However, the homeowner must consider the total cost of the private mortgage.

There should also be a plan to avoid rebuilding the unsecured debt after it has been paid off.

A Time-Sensitive Purchase or Closing

A buyer may consider private financing when a traditional mortgage approval falls apart shortly before closing.

This can happen when:

  • The property does not meet the lender’s guidelines
  • The appraisal is lower than expected
  • Income cannot be accepted
  • Credit changes before closing
  • Down-payment documentation is not acceptable
  • Required documents cannot be obtained in time

A private mortgage may allow the transaction to close, but urgency should not replace proper review.

The borrower should understand how the mortgage will be replaced and whether the overall transaction remains financially reasonable.

Renovations or Property Improvements

Private funds may sometimes be used to repair a property, complete renovations or prepare a home for sale.

This may be considered when the improvements are expected to:

  • Address urgent repairs
  • Complete an unfinished project
  • Improve the property’s marketability
  • Prepare the home for sale
  • Help the property qualify for future financing

Renovation projects can run over budget or take longer than anticipated. The financing plan should account for possible delays and unexpected expenses.

Private First and Second Mortgages

A private mortgage can be registered in first or second position on title.

Private First Mortgage

A private first mortgage becomes the primary mortgage registered against the property.

It may be used to:

  • Replace an existing mortgage
  • Consolidate several debts
  • Address mortgage arrears
  • Finance a property that does not qualify conventionally
  • Provide temporary financing until the borrower can refinance or sell

Because the lender has first priority on title, the pricing may be lower than it would be for a private second mortgage. The actual terms depend on the full application.

Private Second Mortgage

A private second mortgage is registered behind an existing first mortgage.

It may allow a homeowner to access equity without breaking a favourable first mortgage.

This can be useful when:

  • The existing first mortgage has a low interest rate
  • Breaking the first mortgage would trigger a large penalty
  • The homeowner only needs a limited amount of additional funds
  • Replacing the entire first mortgage would be unnecessarily expensive

A second mortgage generally carries more risk for the lender because the first mortgage must be repaid before the second mortgage if the property is sold under enforcement.

As a result, the rate and fees may be higher.

How Property Equity Affects Approval

Private lenders commonly review the loan-to-value ratio, often called LTV.

The calculation is:

Total mortgage debt ÷ property value × 100

For example, assume a property is worth $800,000.

The homeowner has:

  • A first mortgage of $450,000
  • A proposed second mortgage of $100,000

The total mortgage debt would be $550,000.

The combined loan-to-value ratio would be:

$550,000 ÷ $800,000 = 68.75%

The maximum acceptable LTV will vary based on:

  • The lender
  • The property type
  • The location
  • The condition of the property
  • The mortgage position
  • The marketability of the property
  • The strength of the overall application

A property in a major urban market may receive different consideration than a rural, remote, mixed-use or specialized property.

A professional appraisal may be required to confirm the property’s current market value.

When Can a Private Mortgage Make Sense?

A private mortgage may be worth considering when:

  • There is sufficient property equity
  • The reason for borrowing is clearly defined
  • Traditional and alternative options have been reviewed
  • The payments are manageable
  • The borrower understands the risks
  • The mortgage term provides enough time to complete the plan
  • There is a realistic strategy for repayment, refinancing or sale
  • The mortgage is expected to improve or stabilize the situation

The objective should not simply be to obtain an approval.

The financing should give the homeowner a reasonable path forward.

When Might a Private Mortgage Not Make Sense?

Private financing may not be suitable when:

  • The payments are unaffordable from the beginning
  • There is very little equity remaining
  • The requested mortgage will not fully solve the problem
  • The borrower is likely to continue accumulating debt
  • The mortgage only delays an unavoidable sale
  • There is no realistic repayment or refinance plan
  • Too much of the mortgage will be consumed by costs
  • The homeowner does not fully understand the risks

In some cases, selling the property, reducing the requested amount, negotiating with creditors or considering another financial solution may be more appropriate.

A responsible mortgage review should include those possibilities.

A Brief Note About Costs and Exit Planning

Private mortgage costs can include more than the interest rate. Depending on the transaction, the borrower may also be responsible for lender, brokerage, legal, appraisal, renewal and discharge costs.

Part 2 of this series explains how those expenses affect the total borrowing cost and the amount of money the homeowner actually receives.

Most private mortgages are also intended to be temporary. Before closing, the borrower should understand how the mortgage will be repaid, refinanced or discharged.

Part 3 of this series explains how to build a realistic private mortgage exit plan.

Speak With a Mortgage Agent About Your Options

Not every homeowner who is declined by a bank should automatically use a private mortgage.

Robert Silipo is a Mortgage Agent Level II with Mortgage Alliance and operates RS Mortgage Solutions.

Robert works with homeowners across Durham Region, the Greater Toronto Area and Ontario who need help reviewing traditional, alternative and private mortgage options.

A proper review should consider:

  • Why the funds are needed
  • The available property equity
  • The monthly payment
  • The risks of the proposed mortgage
  • Other available options
  • The longer-term plan

To discuss your mortgage situation, contact:

Robert Silipo
Mortgage Agent Level II
RS Mortgage Solutions
Mortgage Alliance Company of Canada

Phone: 905-435-2629
Email: robert@rsmortgagesolutions.ca

Apply online:
apply.mortgageboss.ca/MAC/RobertSilipo