For Canadians with unstable income or a poor credit, going for a private mortgage may be their only option. But the high mortgage rates and fees can add up.For Canadians with unstable income or a poor credit, going for a private mortgage may be their only option. But the high mortgage rates and fees can add up.

Expert says homeowners need to ensure they have an exit plan in place, as a private mortgage comes with significant costs and risks for borrowers — and lenders

By Srivindhya KolluruContributing Columnist

Sun., May 14, 20232 min. read

Article was updated 2 days ago

For Canadians with a poor credit score, unstable income or for another reason that cannot secure a mortgage through a big bank, going through a private lender may be the way to go. But is it worth the risk?

While a traditional lender places a great deal of weight on your credit history and income, private lenders focus on the amount of equity in the property.

With the cost of borrowing so high, there’s been an uptick in the number of Canadians taking on private mortgages. In Ontario, private mortgages jumped 72 per cent from $13 billion in 2019 to $22.4 billion in 2021, according to a recent report by the Financial Services Regulatory Authority of Ontario (FSRA).

Generally one to two years in length, private mortgages are often a temporary option for homeowners until their finances improve. Then, the goal is to switch to a traditional lender, which offers cheaper mortgages and interest rates.

A private mortgage comes with significant risk for lenders and borrowers.

“The less qualified the borrower or, the riskier the mortgage being offered, the higher the rate and the higher the lending fee,” explains James Laird, president of CanWise Financial and co-founder of financial comparison site Ratehub.ca.

Those costs can add up. Take a $700,000 mortgage, for example: with a nine per cent interest rate and, say, five per cent in fees, you could be staring down about $98,000 in borrowing costs during the first year. (Mortgages through traditional lenders don’t carry broker or lender fees.)

Given how risky they are, Christopher Molder, principal broker at Toronto-based Tridac Mortgages, says private lenders are well protected to enforce the mortgage through something like a power of sale, a situation where the lender has the legal right to sell the property due to nonpayment by the borrower.

Already, some brokers have seen an increase in private mortgages default in the GTA, from around two per cent to as high as four per cent.

“The best use case for private mortgages is where it’s an existing homeowner that owns real estate already, they have equity, and they need solve an immediate pain point,” says Molder. “It could be for debt consolidation or to improve cash flow to a point where they’re ready to sell the home.”

Either way, Molder believes private mortgages are not a final destination.

“Anybody taking out a private mortgage should be consulting with a broker or professional and know what their exit strategy will be 12 months from now,” says Molder.

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