A private mortgage can provide access to financing when traditional or alternative lenders are unable to approve an application.

However, the cost of private financing usually involves more than the interest rate shown in the mortgage commitment.

Homeowners may also be responsible for lender fees, brokerage fees, legal expenses, appraisal costs and other charges. Some private mortgages also have interest-only payments, meaning the regular payment may not reduce the amount borrowed.

Understanding the total borrowing cost and the amount of money the homeowner will actually receive is essential before accepting a private mortgage.

Private Mortgage Series

This is Part 2 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

Part 1 examined when homeowners may consider private financing. This article focuses specifically on how private mortgages are priced and what borrowers should review before signing a commitment.

Why Do Private Mortgage Rates Vary?

There is no single private mortgage rate that applies to every borrower.

Private lenders evaluate the overall risk of the transaction. Pricing may be affected by:

  • The property’s location
  • The property type and condition
  • The requested mortgage amount
  • The loan-to-value ratio
  • Whether the mortgage is in first or second position
  • The borrower’s credit and payment history
  • The reason the funds are required
  • The expected mortgage term
  • The strength of the repayment strategy

A well-located residential property with substantial equity may receive different pricing than a rural, commercial, mixed-use or specialized property.

A private second mortgage may also carry a higher rate than a private first mortgage because the second lender has less security if the property must be sold.

Interest Rate Versus Total Cost

The interest rate is important, but it should not be considered by itself.

Two mortgage offers could have different combinations of:

  • Interest rates
  • Lender fees
  • Brokerage fees
  • Prepayment terms
  • Renewal costs
  • Mortgage terms
  • Legal expenses

The offer with the lowest rate may not necessarily have the lowest overall cost.

For example, one lender may offer a lower rate but charge a larger lender fee and a significant prepayment penalty.

Another lender may charge a slightly higher rate but offer lower upfront fees and more flexible payout terms.

The better option may depend on how long the borrower expects to keep the mortgage.

A homeowner who expects to sell or refinance within several months may place greater value on an open mortgage than on a slightly lower rate with a large penalty.

Interest-Only Mortgage Payments

Many private mortgages have interest-only payments.

With an interest-only mortgage, the regular monthly payment covers the interest charged on the loan but does not normally reduce the principal balance.

For example, consider a $200,000 private mortgage at an annual interest rate of 10%.

The approximate monthly interest-only payment would be:

$200,000 × 10% ÷ 12 = $1,666.67 per month

After 12 monthly payments, the borrower may still owe the original $200,000 principal balance.

This differs from a principal-and-interest mortgage, where part of each payment reduces the amount owing.

Interest-only payments may reduce the monthly payment compared with an amortized mortgage, but the borrower must be prepared to repay or replace the full principal balance later.

Lender Fees

A lender fee is charged by the private lender for providing the financing.

It is often calculated as a percentage of the mortgage amount, although the structure can vary.

For example, if the lender charges a 2% fee on a $200,000 mortgage:

$200,000 × 2% = $4,000

The fee may be:

  • Deducted from the mortgage proceeds
  • Added to the mortgage balance
  • Paid separately at closing

Borrowers should confirm:

  • The exact dollar amount
  • How the fee will be paid
  • Whether interest will be charged on a financed fee
  • Whether another lender fee may apply at renewal

A fee added to the mortgage balance increases the amount owing and may also increase the interest cost.

Brokerage Fees

A mortgage brokerage may charge a fee for arranging private financing.

The fee may reflect the work involved in:

  • Reviewing the borrower’s circumstances
  • Evaluating potential financing options
  • Packaging and submitting the application
  • Negotiating with lenders
  • Reviewing proposed mortgage terms
  • Coordinating the closing process
  • Helping establish a repayment plan

The borrower should understand:

  • The amount of the fee
  • Whether it is a percentage or fixed amount
  • When the fee becomes payable
  • Whether it will be deducted from the mortgage advance
  • Whether it is refundable if the transaction does not close

The borrower should also be able to distinguish clearly between the lender fee and the brokerage fee.

Legal Costs

A lawyer is generally required to complete a private mortgage transaction.

The borrower’s lawyer may:

  • Review the mortgage documents
  • Explain the borrower’s legal obligations
  • Conduct title searches
  • Register the mortgage
  • Pay out existing mortgages or debts
  • Distribute the remaining funds
  • Report on the transaction

The private lender may also have a lawyer.

Depending on the mortgage terms, the borrower may be responsible for the lender’s legal costs in addition to their own legal expenses.

Legal costs may increase when:

  • Multiple mortgages or liens must be paid
  • Title issues must be corrected
  • Property taxes are in arrears
  • Independent legal advice is required
  • The closing is urgent
  • The transaction is unusually complex

Borrowers should request an estimate and confirm which legal expenses will be deducted from the mortgage proceeds.

Appraisal Costs

A private lender may require a professional appraisal to confirm the property’s current market value.

The appraisal can affect:

  • The maximum mortgage amount
  • The loan-to-value ratio
  • The lender’s willingness to proceed
  • The rate and terms offered

The borrower commonly pays the appraisal cost.

Private lenders may require the appraisal to be completed by an appraiser from an approved list. Therefore, the homeowner should confirm the lender’s requirements before ordering an appraisal.

An earlier appraisal or real estate estimate may not be accepted.

Other Potential Costs

Depending on the lender and mortgage terms, additional charges may include:

  • Title insurance
  • Mortgage administration fees
  • Discharge fees
  • Statement fees
  • Late-payment charges
  • Non-sufficient-funds fees
  • Property-inspection charges
  • Renewal or extension fees
  • Enforcement expenses

Not every private mortgage includes all these costs.

The borrower should review the mortgage commitment and legal documents carefully so there are no surprises later.

Understanding Net Mortgage Proceeds

The approved mortgage amount is not necessarily the amount of money the homeowner will receive.

The net mortgage proceeds are the funds remaining after required payouts and deductions.

For example, consider a new private mortgage of $200,000 with:

  • Existing mortgage payout: $120,000
  • Lender fee: $4,000
  • Brokerage fee: $3,000
  • Estimated legal expenses: $2,500
  • Appraisal cost: $500
  • Property-tax arrears: $5,000

The estimated net funds would be:

$200,000 − $120,000 − $4,000 − $3,000 − $2,500 − $500 − $5,000
= $65,000

The borrower was approved for a $200,000 mortgage, but only approximately $65,000 would remain available after the required payouts and costs.

Before accepting a commitment, the homeowner should review an estimated use-of-funds calculation showing:

  • The new mortgage amount
  • Existing mortgage payouts
  • Debts being paid
  • Estimated fees and legal costs
  • The expected funds remaining

This helps confirm whether the proposed mortgage will actually accomplish its intended purpose.

Open Versus Closed Private Mortgages

A private mortgage may be open or closed.

Open Private Mortgage

An open mortgage generally allows the borrower to repay some or all of the mortgage before maturity without a traditional prepayment penalty.

This may be useful when the borrower expects to:

  • Sell the property
  • Refinance quickly
  • Receive money from another source
  • Complete renovations and repay the loan

The rate or fees may be higher in exchange for this flexibility.

Closed Private Mortgage

A closed mortgage may restrict early repayment or impose a prepayment charge.

Before accepting a closed mortgage, the borrower should understand:

  • Whether partial prepayments are allowed
  • Whether the mortgage can be discharged early
  • How the penalty will be calculated
  • Whether a minimum amount of interest is payable
  • Whether lender approval is required for an early payout

A slightly lower rate may offer little value if an expensive penalty prevents the borrower from carrying out the expected exit strategy.

Renewal and Extension Costs

Many private mortgages have relatively short terms.

If the mortgage cannot be repaid or refinanced by maturity, the borrower may need a renewal or extension.

Renewal is not guaranteed.

The lender may review:

  • The mortgage payment history
  • The current property value
  • The remaining equity
  • Property-tax status
  • Property insurance
  • The condition of the property
  • The updated repayment plan

A renewal may include:

  • A new interest rate
  • A lender renewal fee
  • Additional brokerage costs
  • Legal expenses
  • An updated appraisal
  • New conditions

If renewal fees are added to the mortgage balance, the amount owing may increase.

A borrower should not assume that renewal will automatically be available or affordable.

Questions to Ask Before Signing

Before accepting a private mortgage, borrowers should ask:

  1. What is the interest rate?
  2. Are the payments interest-only?
  3. What is the lender fee?
  4. What is the brokerage fee?
  5. What legal and appraisal costs are expected?
  6. Will any fees be added to the mortgage balance?
  7. What are the estimated net proceeds?
  8. Is the mortgage open or closed?
  9. What happens if the mortgage is repaid early?
  10. Are there renewal or extension fees?
  11. What happens if a payment is missed?
  12. When does the mortgage mature?

The borrower should receive clear answers before committing to the financing.

Look Beyond the Advertised Rate

Comparing private mortgage options requires more than comparing interest rates.

A complete review should consider:

  • The total upfront cost
  • The monthly payment
  • The amount of usable funds
  • The mortgage term
  • Prepayment flexibility
  • Renewal costs
  • The expected length of time the mortgage will remain in place

The lowest advertised rate is not always the least expensive or most suitable option.

Speak With a Mortgage Agent About Private Mortgage Costs

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 private mortgage cost review should clearly explain:

  • The interest rate
  • The estimated monthly payment
  • Lender and brokerage fees
  • Legal and appraisal expenses
  • Net mortgage proceeds
  • Renewal and prepayment terms

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

Mortgage approvals are subject to lender criteria, property review, satisfactory documentation and applicable terms and conditions. Rates, fees and mortgage terms vary by lender and application. Private mortgages generally cost more than traditional mortgage financing and may not be suitable for every borrower.