For many Ontarians, homeownership is a key financial and personal goal. Yet for an increasing number of would-be buyers, securing traditional mortgage financing through a bank or credit union has become more challenging. Tighter federal lending rules, rising interest rates, and evolving credit standards have pushed some prospective buyers out of the conventional lending system. In this context, private mortgages have emerged as a viable (although sometimes more expensive) alternative.
Private mortgage lending plays a growing role in Ontario’s real estate market, particularly for those who do not meet the stringent criteria of institutional lenders. While this type of financing may carry greater risks and higher costs, it also offers flexibility that can make the difference between a declined application and a closed transaction. Buyers, investors, and even current homeowners looking to refinance are increasingly looking to private mortgage lenders when the bank says no.
Understanding what private mortgages are, how they work, and what legal considerations they involve is essential for both borrowers and their advisors.
The Rise of Private Mortgages in Ontario
Private mortgages are loans secured by real property, issued by individuals, private corporations, or mortgage investment corporations (MICs) rather than traditional banks. These lenders operate outside the conventional mortgage market, meaning they are not bound by the same regulatory framework or lending criteria as federally regulated financial institutions.
Over the past decade, the demand for private mortgage financing in Ontario has steadily grown. Several factors contribute to this trend. First, the federal government’s implementation of the mortgage stress test in 2018 made it more difficult for borrowers to qualify for insured mortgages. Second, the Bank of Canada’s interest rate hikes have reduced affordability, especially for those carrying variable-rate debt or large consumer loans. Finally, increased real estate prices across the province have pushed many buyers into higher loan-to-value ranges that traditional lenders are reluctant to support.
In this environment, private lenders offer a lifeline. They focus more on the value of the property and the equity in the deal than on a borrower’s credit score or employment history. While banks assess borrowers based on income ratios and creditworthiness, private lenders are often more concerned with whether they can recover their investment through foreclosure if necessary.
Who Typically Uses Private Mortgage Financing?
Private mortgages are not limited to borrowers with poor credit. While they do offer a solution for those who have experienced past financial hardship or bankruptcies, their appeal extends further. Self-employed individuals with irregular income streams, newcomers to Canada without extensive credit histories, and real estate investors with multiple properties may all struggle to meet the requirements of institutional lenders.
Private financing is also commonly used in time-sensitive situations. Buyers who need to close quickly, bridge financing gaps, or secure short-term loans during construction or renovation projects may turn to private lenders for speed and flexibility. Sometimes, homeowners facing foreclosure or power of sale proceedings use private second mortgages to consolidate debt or buy time to stabilize their finances.
The ability to tailor loan terms, such as interest-only payments, short amortization periods, and flexible repayment schedules, makes private mortgages attractive for specific borrowers, even if they come at a premium cost.
Key Legal Features of Private Mortgage Agreements
Private mortgage agreements differ from institutional ones in several important ways. Although they still require registration against the property, the terms and enforcement mechanisms can be more aggressive, especially where a borrower defaults. Legal counsel typically prepares these agreements and should be reviewed carefully before signing.
Many private mortgages are interest-only and structured as short-term loans. Depending on the borrower’s risk profile and the property’s location and value, the lender may charge higher interest rates. Lenders also charge fees, such as lender, broker, and legal fees, which can add significantly to the loan’s cost.
Default provisions in private mortgages are stricter than those in conventional loans. Missed payments, failure to maintain insurance, or default on other secured obligations can trigger immediate enforcement, including the right to sell the property under the power of sale. Because private lenders are not bound by the same consumer protection laws as banks, borrowers must fully understand their rights and obligations before committing.
Legal Protections and Disclosure Requirements
Private mortgages in Ontario are subject to provincial and federal laws, including the Mortgages Act, each providing some protection to private lenders. Additionally, if the transaction is facilitated by a mortgage broker, the Mortgage Brokerages, Lenders and Administrators Act requires the broker to disclose the cost of borrowing and ensure the borrower understands the loan’s terms. Where a broker is involved, a mortgage suitability assessment must be conducted, and a disclosure form must be provided before the borrower signs any agreement.
In addition, Ontario’s Consumer Protection Act may apply in certain residential transactions, especially where the loan includes high fees or unfair terms. Although private lenders may operate with more freedom than banks, they are still required to act in good faith and avoid misleading or deceptive practices. Borrowers who believe they have been taken advantage of can seek redress through civil litigation, but should do so with the guidance of a qualified litigation lawyer.
Legal counsel is also critical in the early stages of the mortgage. The borrower’s lawyer will review the commitment letter, confirming the total cost of borrowing and ensuring that the mortgage is correctly registered on title. Failure to identify red flags, such as excessively high fees, ambiguous default provisions, or inadequate disclosure, can expose borrowers to unnecessary risk.
Risks of Private Mortgage Financing
While private mortgages offer access to financing that would otherwise be unavailable, they are not without risk. The most obvious is the cost. Higher interest rates and fees mean the borrower pays significantly more over the loan term than with a traditional mortgage. For borrowers who are already financially strained, this added cost can accelerate the path to insolvency.
Another risk is the short-term nature of most private mortgages. Borrowers must either refinance or repay the loan at maturity, which may be difficult if their financial situation has not improved or if market conditions have changed. Failure to repay may result in foreclosure or a power of sale, even where the borrower has made all interest payments on time.
Borrowers must also consider the possibility of predatory lending practices. Some private lenders may exploit vulnerable borrowers by imposing onerous terms, charging excessive fees, or misrepresenting the cost and consequences of the loan. While many private lenders operate professionally and transparently, there is less oversight in the sector compared to banks, meaning due diligence is essential.
Private Second Mortgages and Debt Consolidation
Another use of private mortgage financing is a second mortgage. Homeowners who already have a primary mortgage may seek a private second mortgage to consolidate debt, fund renovations, or deal with emergencies. Because the second mortgage is subordinated to the first in terms of repayment priority, it typically carries an even higher interest rate and stricter enforcement terms.
From a legal perspective, second mortgages require careful review. The priority of existing encumbrances must be confirmed through a title search, and the borrower must be aware of the risk of foreclosure if they default on either mortgage. Many private lenders require detailed appraisals, proof of income, and insurance coverage to protect their investment.
Borrowers who use second mortgages to pay off unsecured debt may temporarily relieve financial pressure, but ultimately increase it. Legal advice should be sought to assess the borrower’s full financial picture and determine whether a private second mortgage is a sustainable solution or merely a stopgap.
Private Mortgages are a Tool, Not a Shortcut
Private mortgage financing is not inherently good or bad, but is a financial tool that must be used with care, planning, and legal oversight. For many Ontario buyers and homeowners, it offers access to real estate or liquidity when the traditional banking system is out of reach. However, the flexibility of private lending comes at a cost, and borrowers must weigh the benefits against the risks.
Legal advice is indispensable whether a private mortgage is used to complete a time-sensitive home purchase, consolidate debt, or fund short-term needs.
Tierney Stauffer LLP: Ottawa Residential Real Estate Lawyers Representing Clients Across Ontario
If you are considering a private mortgage or advising a client who is, consult with experienced legal professionals who understand the nuances of real estate financing in Ontario. Tierney Stauffer LLP in Ottawa is ready to assist with contract review, registration, and legal strategy to ensure your transaction is secure, transparent, and fully compliant with the law. For all your real estate legal needs, our team offers extensive experience and a commitment to detail. Contact us at 1-888-799-8057 or via our online form to arrange a consultation with a skilled real estate lawyer.
