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

However, obtaining the mortgage is only one part of the strategy.

Before the private mortgage closes, the homeowner should have a realistic plan for repaying it, replacing it with lower-cost financing or selling the property.

This is commonly called a private mortgage exit strategy.

Without a workable exit plan, a homeowner may reach the maturity date unable to repay the balance. The borrower may then need to renew at a higher cost, sell the property under pressure or face enforcement action.

Private Mortgage Series

This is Part 3 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

Parts 1 and 2 examined when private financing may be appropriate and how to understand its cost. This final article focuses on how homeowners can prepare to leave a private mortgage.

What Is a Private Mortgage Exit Strategy?

An exit strategy is the specific plan for repaying or replacing the private mortgage by the end of its term.

Possible exit strategies include:

  • Refinancing with a traditional lender
  • Refinancing with an alternative lender
  • Improving credit
  • Increasing or better documenting income
  • Reducing other debts
  • Selling the property
  • Selling another asset or property
  • Repaying the mortgage from a known future source
  • Using a combination of these approaches

The plan should be based on realistic and measurable steps.

It should not rely only on assumptions such as:

  • “My credit should improve.”
  • “The property value will probably increase.”
  • “My income may go up.”
  • “The private lender will likely renew.”
  • “I will deal with it closer to maturity.”

Why Is an Exit Plan Important?

Many private mortgages have relatively short terms.

The homeowner may still owe the full principal balance at maturity, particularly when the mortgage has interest-only payments.

If the borrower cannot repay, refinance or sell by the end of the term, the available options may become more limited and expensive.

A practical exit strategy should answer four questions:

  1. What prevented the borrower from qualifying originally?
  2. What must change before the mortgage matures?
  3. How will that change be achieved?
  4. What is the backup plan if the original strategy fails?

Exit Strategy 1: Refinance With a Traditional Lender

Moving from a private mortgage to a traditional bank or credit-union mortgage is often the preferred exit because traditional financing usually offers lower borrowing costs and longer terms.

The borrower must meet the future lender’s requirements when the refinance application is submitted.

Those requirements may include:

  • Acceptable credit
  • Verifiable income
  • Satisfactory debt-service ratios
  • Sufficient property equity
  • Current mortgage payments
  • Current property taxes
  • Valid property insurance
  • Complete supporting documentation

A borrower should not assume that qualifying will happen automatically after one year.

The plan should identify the specific issues that prevented traditional approval and the steps required to correct them.

Exit Strategy 2: Move to an Alternative Lender

A borrower may not yet qualify with a major bank but may qualify with an alternative or B lender.

Alternative lenders may offer more flexibility for:

  • Self-employed borrowers
  • Recent credit issues
  • Non-traditional income
  • Higher debt-service ratios
  • Applications that fall outside bank guidelines

This can sometimes serve as an intermediate step between private financing and a traditional mortgage.

The borrower will still need to satisfy the alternative lender’s requirements, which may include:

  • Minimum credit standards
  • Verifiable income
  • Acceptable mortgage history
  • Sufficient equity
  • A marketable property

The exit plan should determine whether the borrower is realistically moving toward those requirements.

Exit Strategy 3: Improve Credit

Credit improvement can be an important part of leaving a private mortgage.

The plan may include:

  • Bringing overdue accounts up to date
  • Paying bills on time
  • Reducing credit-card balances
  • Avoiding new collections
  • Correcting credit-report errors
  • Limiting unnecessary credit applications
  • Re-establishing credit after a proposal or bankruptcy

Credit improvement takes time.

Paying off a collection or reducing a credit-card balance does not guarantee immediate mortgage approval.

The borrower should understand:

  • Which credit problems must be addressed
  • How much debt must be reduced
  • How much positive payment history may be needed
  • Whether other qualification issues will remain

The mortgage term should provide enough time for meaningful improvement to occur.

Exit Strategy 4: Increase or Better Document Income

Income can be a challenge for borrowers who are self-employed, recently employed, returning to work or earning variable income.

An income-based exit plan may involve:

  • Returning to full-time employment
  • Completing an employment probation period
  • Establishing a longer employment history
  • Increasing business income
  • Filing outstanding tax returns
  • Obtaining updated financial statements
  • Building a sufficient self-employed income history
  • Documenting pension, rental or other income

The plan should distinguish between earning more income and being able to document that income in a form acceptable to a future lender.

For example, a business owner may have strong revenue but still face challenges if the reported taxable income does not support the requested mortgage.

The borrower should understand what documents and income levels are likely to be required.

Exit Strategy 5: Reduce Other Debt

Reducing unsecured debt may improve both credit and future mortgage qualification.

The borrower may need to reduce:

  • Credit-card balances
  • Lines of credit
  • Personal loans
  • Vehicle loans
  • Past-due accounts
  • Other monthly obligations

Lower debt may improve:

  • Credit utilization
  • Monthly cash flow
  • Debt-service ratios
  • The ability to qualify for replacement financing

The borrower should also avoid rebuilding debts that were paid through the private mortgage.

Otherwise, the financial position may be worse when the mortgage reaches maturity.

Exit Strategy 6: Sell the Property

Sometimes the most realistic exit strategy is to sell the property.

A planned sale may be appropriate when:

  • The mortgage payments are not sustainable
  • The borrower cannot qualify for replacement financing
  • The mortgage was arranged to provide time for an orderly sale
  • The property must be completed or repaired before listing
  • A relationship breakdown or estate matter requires a sale
  • The homeowner wants to protect the remaining equity

Selling voluntarily and with enough time may provide more control than waiting until the mortgage is in default.

The borrower should consider:

  • A realistic selling price
  • Real estate commission
  • Legal expenses
  • Mortgage payout amounts
  • Discharge costs
  • Property-tax or utility arrears
  • Repairs required before listing
  • The expected marketing and closing timeline
  • Future housing arrangements

The expected sale proceeds should be calculated conservatively.

The plan should not depend on an unsupported or overly optimistic property value.

Exit Strategy 7: Repay From a Known Future Source

A private mortgage may sometimes be repaid from a specific future event, such as:

  • The sale of another property
  • An inheritance
  • A legal settlement
  • The maturity of an investment
  • A business sale
  • Insurance proceeds
  • A scheduled employment or pension payment

The anticipated funds should be sufficiently certain and expected within the mortgage term.

The borrower should consider:

  • Whether the amount will be enough
  • Whether the timing is reliable
  • Whether taxes or deductions will reduce the proceeds
  • What happens if the funds are delayed
  • Whether supporting documentation is available

A possible future event is not the same as a dependable repayment source.

Build the Exit Plan Before Closing

A useful exit plan should be created before the private mortgage closes.

It should identify the following.

The Original Qualification Problem

Clearly identify why traditional or alternative financing was unavailable.

Examples may include:

  • Low credit score
  • Insufficient documented income
  • High debt-service ratios
  • Mortgage arrears
  • Property-tax arrears
  • Recent employment
  • Property-related concerns

The Required Outcome

Determine what must change before the borrower can exit.

Examples may include:

  • Achieving an acceptable credit profile
  • Reducing credit-card balances
  • Establishing a satisfactory mortgage-payment history
  • Completing employment probation
  • Filing updated tax returns
  • Selling the property

The Action Steps

Set out the specific steps the borrower must take.

For example:

  • Make every mortgage payment on time
  • Keep property taxes and insurance current
  • Avoid taking on new unsecured debt
  • File outstanding income-tax returns
  • Maintain business or employment records
  • Complete renovations by a target date
  • Contact a real estate agent if refinancing becomes unrealistic

The Timeline

The plan should use dates rather than general intentions.

For a 12-month mortgage, a timeline might include:

  • Review credit after three months
  • Update income documents after six months
  • Complete a preliminary refinance review after eight months
  • Submit the refinance application by month nine or ten
  • Begin the sale process if refinancing is not viable

The exact timeline will depend on the circumstances, but the review should start well before maturity.

The Backup Plan

Every exit strategy should have an alternative.

For example:

  • Primary plan: refinance with an alternative lender
  • Backup plan: list the property for sale
  • Final contingency: request a short extension while an accepted sale closes

The backup plan must be started early enough to work.

Do Not Wait Until Maturity

Waiting until the final weeks of the mortgage term creates unnecessary risk.

A refinance may require time for:

  • Document collection
  • Credit review
  • Income verification
  • An appraisal
  • Lender underwriting
  • Mortgage payout statements
  • Legal work
  • Correction of tax or title issues

A property sale may require even more time.

The borrower should review the exit plan during the mortgage term, particularly when:

  • Credit has not improved
  • Income has declined
  • Renovations are delayed
  • The property value has changed
  • New debt has accumulated
  • A repayment source has been delayed
  • Mortgage or tax payments have been missed

The earlier a problem is identified, the more options may remain available.

What Happens If the Exit Plan Is Not Working?

If the original plan becomes unrealistic, the borrower should reassess the situation promptly.

Potential steps may include:

  • Reviewing refinance eligibility again
  • Revising the timeline
  • Reducing the future mortgage amount
  • Paying down more debt
  • Adding an acceptable co-borrower where appropriate
  • Listing the property
  • Discussing renewal or extension options
  • Obtaining legal or financial advice

Renewal may provide more time, but it should not be treated as a guaranteed exit strategy.

A private lender is not required to renew the mortgage.

Any renewal may include:

  • A different interest rate
  • A lender renewal fee
  • Additional brokerage or legal expenses
  • An updated appraisal
  • New conditions

Repeated renewals may gradually reduce the homeowner’s equity without solving the original problem.

Warning Signs That the Plan Is at Risk

Warning signs may include:

  • Late or missed mortgage payments
  • Unpaid property taxes
  • Lapsed insurance
  • Rising credit-card balances
  • New collections or judgments
  • Declining income
  • Delayed tax filings
  • Renovations exceeding the budget
  • A lower-than-expected property value
  • No recent review of refinance eligibility
  • No preparations for a planned sale

These issues should be addressed as early as possible.

A Private Mortgage Should Create a Path Forward

A private mortgage may be useful when it gives the homeowner enough time and financial stability to complete a realistic plan.

A strong strategy should explain:

  • Why the mortgage is required
  • How the payments will be made
  • What must improve during the term
  • When the refinance or sale process will begin
  • How the mortgage will be repaid
  • What will happen if the primary plan fails

The objective should not simply be to remain in private financing.

The objective should be to move toward a more sustainable arrangement whenever possible.

Speak With a Mortgage Agent About Your Exit Strategy

A private mortgage should be arranged with a clear plan for what happens at maturity.

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 evaluating traditional, alternative and private mortgage options.

A private mortgage exit review may include:

  • Reviewing credit and mortgage history
  • Calculating the current loan-to-value ratio
  • Evaluating income documentation
  • Estimating future refinance eligibility
  • Establishing milestones and timelines
  • Reviewing backup options
  • Preparing well before maturity

To discuss your private mortgage or exit strategy, 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 and renewals are subject to lender criteria, property review, satisfactory documentation and applicable terms and conditions. A private lender is not obligated to renew a mortgage. Private mortgages generally have higher rates and fees than traditional financing and may not be suitable for every borrower.