How Can You Avoid Falling for the Wrong Private Mortgage Deal?

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Published: September 12th, 2024 • Last Updated: September 19th, 2024
Author: Ross Taylor on AskRoss.ca

Key advice for the world of private mortgage deals in Canada

Private mortgages are becoming an increasingly popular option for Canadians, especially as traditional lenders tighten their lending criteria. But what exactly is a “private mortgage deal”, and who might benefit from funding one?

I’ve seen too many situations where a private mortgage deal looked great on the surface—only to fall apart when you dig a little deeper. Whether you’re a homeowner considering a private mortgage, an investor looking to lend, or just exploring options, you need to know what to watch out for.

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What is a private mortgage deal?

Before diving into the intricacies of how to avoid bad private mortgage deals, let’s start with the basics. A private mortgage is a loan given to a borrower by an individual or group of private lenders rather than a traditional financial institution like a bank or credit union.

These types of mortgages often come into play when the borrower doesn’t qualify for conventional financing, either due to bad credit, inconsistent income, or failing to meet the stress-test requirements set by regulated lenders.

Even with a good income, there are a few reasons you might still need a private mortgage in Canada. Traditional lenders don’t just look at your income—they’re also strict about credit history, employment status, and property type.

Six examples of when you would need a private mortgage solution with a good income:

1. Foreign investors often face challenges

When trying to secure a traditional mortgage in Canada, even with a strong income. Canadian banks typically require a history of Canadian credit, local employment, or large down payments, which can be difficult for non-residents to provide.

Private mortgages, on the other hand, offer a more flexible solution for foreign investors looking to purchase property in Canada. Private lenders are often willing to overlook the lack of Canadian credit history or local income, focusing more on the value of the property and the investor’s ability to provide a larger down payment.

2. You have poor or limited credit history

Even with a good income, a poor or limited credit history can block you from traditional lenders. Private lenders tend to be more flexible with credit issues.

3. You are self-employed or have unconventional income

Being self-employed or earning income from unconventional sources, like getting paid in crypto, can make banks hesitant. Private lenders, however, are more open to working with alternative income verification and are often more flexible with unique financial situations.

4. The property you wish to purchase is in the irregular category

If you’re buying an unconventional property, like a cottage or a fixer-upper, traditional lenders might shy away. Private lenders are often more willing to finance these.

5. You want to consolidate your debt or have a need for short-term gains

A private mortgage can help consolidate debt or cover short-term financial needs, even if your current debt load affects traditional mortgage approval.

6. You failed the mortgage stress test

Canada’s mortgage stress test requires you to prove that you can handle mortgage payments at a higher interest rate than what you’re being offered. If you don’t pass, even with a good income, a private mortgage might be your best option to move forward with a home purchase.

Private mortgages usually have shorter terms—typically between one to three years—and come with higher interest rates to reflect the increased risk that lenders are taking on.

They can be a lifeline for borrowers who don’t fit the mold of traditional lenders, but they also present risks for both borrowers and lenders that need to be carefully considered.

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Who is an ideal candidate to fund a private mortgage deal?

Private mortgage deals aren’t just for borrowers who can’t secure traditional financing; they can also be an appealing investment opportunity for certain types of investors. If you’re someone looking for higher returns than what GICs, bonds, or savings accounts offer, private mortgage lending might be worth considering.

However, this type of investment is not for everyone. The ideal candidate for funding a private mortgage deal typically has:

  • You have a higher risk tolerance, as private mortgages inherently carry more risk than conventional investments.
  • You have capital available to invest for a shorter term, typically one to three years.
  • You desire better returns than what they’d get from low-risk, fixed-income products.
  • You have a solid understanding of real estate and the mortgage market or access to a trusted financial advisor who can help navigate the complexities.

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What are the pros of funding a private mortgage deal?

  • Higher returns: Private mortgage investors often earn a better return than traditional investments like bonds or GICs, with rates of 8% to 12% not uncommon.
  • Shorter investment terms: Private mortgages usually have shorter terms, making it easier for investors to recoup their principal sooner than with long-term investments.
  • Diverse investment opportunity: Investing in private mortgages can diversify an investment portfolio, particularly if you already have exposure to stocks or bonds.
  • Secured by real estate: In the event of default, private mortgage lenders have the property as collateral, which can help mitigate losses.

What are the cons of funding a private mortgage deal?

  • Higher risk: With greater reward comes greater risk. Private mortgages are riskier than conventional investments, particularly if the borrower defaults or the property value drops.
  • Lack of liquidity: Unlike stocks or mutual funds, private mortgages are not liquid investments. You can’t easily sell them if you need quick access to cash.
  • Administrative responsibility: As a private mortgage lender, you may be involved in managing the loan, including legalities and dealing with potential defaults, which can be time-consuming.
  • Market fluctuations: The value of the property securing the loan can drop, especially during market downturns, increasing the risk that you won’t recover your full investment if the borrower defaults.

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The New Rules for Private Mortgages in Ontario

Here’s some good news for those of us in Ontario: starting in April 2024, only Mortgage Agents with a Level 2 license will be able to handle private mortgages. This new regulation is long overdue. It’s designed to protect everyone—lenders, borrowers, and the professionals brokering these deals.

For you, the homeowner or investor, this means you should only work with professionals who are properly qualified to handle private mortgages. Don’t hesitate to ask about your broker’s licensing credentials. If they don’t have a Level 2 license, walk away.

5 ways to spot a bad private mortgage deal

Unfortunately, not all private mortgage deals are created equal. Some can be downright risky.

Here are five warning signs to watch for when evaluating a private mortgage offer:


1. The rush to close

You’ve probably seen the word “URGENT” pop up in bold on a mortgage solicitation before. It might sound exciting, but let me tell you, a rush to close often means someone is hiding something. A solid mortgage deal takes time to evaluate.

So, if you’re being pressured to make a quick decision without all the information, pump the brakes and take a closer look.

2. Lack of proper documentation

A good private mortgage offer will come with plenty of supporting documents. If you’re being asked to make a significant investment or take on a large mortgage, you should see proof of income, property appraisals, and a clear breakdown of the borrower’s financial position.

If the paperwork is sparse, incomplete, or hard to follow, that’s a major warning sign. Strong applications come with well-organized, comprehensive documentation.

3. Inflated values and inaccurate LTVs

Be wary of deals where the LTV is calculated based on an inflated property value. I’ve seen too many cases where a property is listed at a higher value to make the numbers look better, only for the true value to be much lower.

Always ask how the LTV was calculated and whether it’s based on the original purchase price or an appreciated estimate.

3. Incomplete or misleading borrower information

If a borrower’s assets or liabilities don’t add up, you could be stepping into risky territory. Sometimes, key details about a borrower’s financial health are either exaggerated or left out altogether.

Always demand full transparency and verification of any claims about the borrower’s financial situation.

4. High LTV Ratios on second mortgages

High LTV ratios are always risky, but even more so on second mortgages. If you’re being offered a second mortgage with an LTV pushing 85% or more, you’re taking on a lot of risk.

Also, If your borrower defaults, the first mortgage will get paid first, leaving you potentially out of pocket.

5. Weak or Unrealistic Exit Strategy

Private mortgages are often short-term, so the borrower should have a clear plan to repay the loan or refinance it with a traditional lender.

If the exit strategy is vague or seems too optimistic, like relying on refinancing to a bank without considering the borrower’s actual financial profile, you could be in for a long and costly process of recovering your funds.

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Why would someone want to fund a private mortgage deal?

You may be asking, “If there is so much potential risk involved in private mortgage deals, why would I want to fund one?” Investing in private mortgages can be an appealing option for those looking for higher returns without the volatility of the stock market.

With private mortgages, you know exactly where your money is going, and the investment is secured against a tangible asset—real estate. This can provide a sense of security compared to riskier, unsecured investments.

Moreover, many private mortgage investors are drawn to the short-term nature of these loans. While traditional investments may lock up your capital for five, ten, or even twenty years, private mortgages typically have much shorter terms, making them more attractive for those who want quicker access to their principal.

However, it’s essential to go in with your eyes wide open. Private mortgage lending carries risks that aren’t present in more traditional, lower-yielding investments. As with any financial decision, make sure you thoroughly understand the deal, your borrower’s financial situation, and the potential risks before proceeding.

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Advice for private mortgage borrowers

Private mortgages can be a great alternative for borrowers and an investment opportunity for lenders, but they require careful vetting. As I always say, haste makes waste—and in this case, it could lead to serious financial losses for you and your family.

If you’re considering a private mortgage as a borrower, take your time, do your due diligence, and make sure everything checks out before you proceed. Always work with a qualified mortgage professional who understands the risks and rewards of these deals.

Private mortgage terms can sometimes seem appealing, but they might come with risks you’re not fully aware of. If you need a second opinion, I’m happy to review the offer, explain any fine print, and provide clear guidance on whether it’s the best fit for your financial situation. A little extra advice can go a long way in ensuring you’re making a smart decision- book your consultation today.

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How I can help as your Private Mortgage Consultant

Looking to diversify your portfolio by entering the world of private mortgage lending? Let’s talk. Not only will I connect you with my trusted network of real estate professionals and fellow mortgage brokers—who have the inside scoop on exclusive private mortgage deals—I also provide a comprehensive service to ensure your investment is secure.

I will work with you personally to provide a detailed analysis of the borrower’s risk profile, property value, and mortgage terms, ensuring the deal maximizes your return while minimizing risk. My hands-on approach will give you the confidence to make informed investment decisions and provide you with clear guidance on whether it’s a deal worth pursuing.

Private lending can be profitable, but it’s often complex. If you’ve been offered a deal and aren’t sure about the terms, I’m here to help. With my expert guidance and reputable network, you’ll have a clear understanding of the risks and rewards. I’ll ensure the deal is structured in your favour and that you’re fairly compensated for the level of risk you’re taking on.

Whether you’re interested in expanding your investment portfolio or unsure about a private mortgage offer you have in hand and want a second opinion, feel free to contact me at [email protected]. I’m always happy to review deals and provide advice on what makes sense for you and your finances.

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