How do private mortgages work? They let you borrow against your home equity from individual investors or private lending companies instead of banks. Traditional lenders check your credit score and income first. Private lenders care about one thing: whether you have enough equity in your property. You make interest-only payments for a short term (usually one to two years), then either refinance with a bank or renew with another private lender. The catch? Higher rates and fees than you would pay at a bank or credit union.
This guide walks you through everything you need to know about private mortgages in Canada. You will learn who qualifies, what rates and fees to expect, and what risks come with this type of financing. We will also cover when a private mortgage makes sense for your situation and what other options might work better. Whether you have been rejected by banks or need quick access to your home equity, you will finish this article knowing exactly how private mortgages work and whether they fit your needs.
Why private mortgages matter in Canada
Traditional banks have tightened their lending standards over the past decade. The mortgage stress test forces you to qualify at rates higher than you will actually pay, which pushes many Canadians out of traditional financing. Self-employed workers, those with bruised credit, or newcomers to Canada struggle most with strict income documentation requirements that banks impose.
Filling the gap between rejection and funding
Private mortgages solve a specific problem: you have substantial home equity but cannot meet traditional lending criteria. Perhaps your debt ratios sit too high, you lack two years of tax returns, or you need cash within days instead of weeks. Understanding how do private mortgages work shows you they serve as a temporary bridge to better financing later.
The Bank of Canada reports private lenders now hold 6-8% of mortgage market share, double their portion from a decade ago.
Markets grow when demand exists. Traditional lenders reject borrowers with strong equity simply because the rules do not flex, which is exactly where private mortgages matter most.
How to get a private mortgage
Most borrowers reach private lenders through mortgage brokers rather than searching independently. A broker who specialises in alternative lending maintains relationships with dozens of private investors and lending corporations across Canada. They match your equity position and needs to lenders who will fund your situation. You skip months of trial and error by working with someone who already knows which lenders approve properties in your area.
Finding the right private lender
Mortgage Investment Corporations (MICs) pool money from multiple investors to fund private mortgages. They operate more like businesses with standard approval criteria and processes. Individual private lenders might be friends, family, or independent investors who lend their own capital. Both types look at your property value first, but MICs typically move faster because they have ready capital available.
Verify any private lender or broker holds proper licensing through your provincial regulator before signing documents or paying fees.
Your broker should explain why they recommend a specific lender and how that lender fits your situation better than others. Push back if they cannot give you clear reasons.
What documents you need
Private lenders require far less paperwork than banks, but you still need to prove property ownership and value. Expect to provide a recent property appraisal, proof of home insurance, property tax statements, and valid identification. Lenders want to confirm you own the property, verify its value, and ensure it carries proper insurance coverage.
Documents showing your income might help negotiate better rates, but most private lenders will approve you based purely on equity. Understanding how do private mortgages work means recognising that your property secures the loan, so lenders care more about the asset than your paycheque.
What to expect with rates, fees and terms
Private mortgage rates start around 8% and climb past 15% depending on your equity position and property type. Banks charge 5% to 7% for conventional mortgages right now, which makes private lending significantly more expensive. You pay this premium because lenders accept the risk that traditional institutions reject. Properties in major cities with strong markets typically qualify for rates at the lower end, while rural properties or those needing repairs push rates higher.
Interest rates reflect your equity position
Lenders quote better rates when you borrow less than 65% of your property value. Borrowing 75% of your home’s value costs more because the lender takes on additional risk. Your credit score influences rates even though it does not determine approval. Demonstrating stable income, providing strong documentation, or securing a guarantor can all nudge your rate down by half a percentage point or more.
Private lenders set rates individually based on property location, loan-to-value ratio, and how quickly you need funding.
Understanding how do private mortgages work means accepting that you negotiate rates rather than receive standard published pricing like banks offer.
Expect lender fees between 1% and 4% upfront
Most private lenders charge a lender fee ranging from 1% to 4% of your loan amount, collected at closing. Borrow £100,000 and you might pay £2,000 to £4,000 immediately. Broker fees add another 1% to 2% if you worked with a mortgage broker to arrange the loan. Legal fees for preparing documents and registering the mortgage run £1,000 to £2,000 extra. Factor these costs into your total borrowing needs because they reduce the net cash you receive.
Terms run six months to two years maximum
Private mortgages rarely extend beyond two years, with 12-month terms being most common. You make interest-only monthly payments that do not reduce your principal balance. At maturity, you either refinance with a traditional lender, renew with another private lender, or sell the property. Renewal typically requires paying lender fees again, which makes staying in private financing expensive long-term.
Key risks and how to manage them
Private lenders foreclose faster than banks when you miss payments, sometimes starting the process after just one late payment. Traditional lenders typically give you multiple chances to catch up and work out payment plans. Interest-only payments mean you build zero equity over the loan term, so your property value must increase just to break even after paying all fees. Short terms create pressure because you must qualify for traditional financing or find another private lender before your 12 to 24 months expire.
Avoiding foreclosure and payment defaults
Set up automatic payments from your bank account to eliminate the risk of forgetting a due date. Build a three-month payment reserve when you close your mortgage so unexpected income drops do not immediately threaten your home. Communicate with your lender at the first sign of payment trouble rather than avoiding their calls. Some private lenders will work with you temporarily if you show good faith effort, but you need to reach out before missing payments.
Contact your lender immediately if you anticipate missing a payment, as private lenders have less patience than banks but may offer short-term solutions.
Planning your exit strategy before you borrow
Understand how do private mortgages work by accepting they are temporary solutions, not long-term financing. Work with a financial advisor or mortgage broker to create a concrete plan for qualifying with traditional lenders when your term ends. This might mean paying down other debts, building credit history, or stabilising your income documentation. Calculate whether you can afford renewal fees if traditional refinancing fails. Properties in declining markets pose extra risk because falling values make both traditional refinancing and private renewals harder to secure.
Alternatives to private mortgages
Several options exist before resorting to private lending, each with distinct advantages over high-cost private mortgages. Exploring these alternatives helps you avoid the steep rates and short terms that make private financing challenging. Understanding how do private mortgages work alongside other options lets you choose the best path for your situation.
Adding a co-signer to strengthen your application
Co-signers with strong credit and stable income help you qualify for traditional mortgages at bank rates. Your co-signer assumes full responsibility if you default, which motivates banks to approve applications they would otherwise reject. Parents commonly co-sign for children, and spouses co-sign when one partner has weak credit.
Waiting to rebuild your financial position
Time often proves the cheapest solution when you can delay borrowing. Spend six to twelve months paying down debts, rebuilding credit, or documenting stable income. Traditional lenders offer rates 5% to 10% lower than private mortgages, which saves you thousands in interest and fees.
Delaying your mortgage by one year to improve your credit score can save you tens of thousands over a five-year term.
Bringing it all together
Private mortgages work by lending against your home equity rather than your income or credit score. You pay higher rates and fees in exchange for faster approval and flexible qualification standards. These loans serve as temporary bridges to traditional financing, not permanent solutions. Your property secures the loan, which means lenders can foreclose quickly if payments stop.
Understanding how do private mortgages work helps you decide whether the cost and risk fit your situation. Explore alternatives like co-signers or waiting to improve your financial profile before committing to private lending. Calculate total costs including lender fees, broker commissions, and legal expenses. Build a concrete exit strategy before signing documents so you know exactly how you will refinance when your short term ends.
Need more guidance? Browse our latest articles on private mortgages for additional strategies and insights tailored to Canadian borrowers.