Private Lending in Ontario: Your Guide to Alternative Financing Solutions

The real estate financing landscape has undergone a significant transformation over the past few years. Increasing interest rates, more stringent lending requirements among the conventional banks and the changing market dynamics have driven most Ontario property owners and investors to consider using private lending as an alternative. This is necessary whether you are a homeowner who has been caught and stuck in some unexpected monetary situations, a property investor in need of a quick fix of money, or a person simply looking at alternative mortgage options in Ontario.

 

Think of it this way: when traditional banks say no, private lenders often say yes, but with different terms, faster timelines, and unique considerations. At Pacific Legal, we guided you through private mortgage lending transactions. We’ve seen firsthand how the right legal guidance can make all the difference.

What is Private Lending?

Private lending refers to mortgage financing provided by individuals, private corporations, or Mortgage Investment Corporations (MICs) rather than traditional banks or credit unions. These are real people and organizations lending their own capital, secured by tangible assets, such as real estate.

 

Let’s say you are refurbishing your home, and your bank would not lend you more money since you are a self-employed person with unstated income. In Ontario, a private mortgage lender may not be interested in your employment, but in what counts, the value of your property and the equity that you have developed. That’s the fundamental difference: asset-based lending focuses on collateral rather than conventional qualification criteria.

 

Private real estate lending in Ontario typically involves:

• Short-term bridge financing (usually 6 months to 3 years)
• Higher interest rates than traditional mortgages (currently ranging from 8% to 12%)
• Flexible capital options for borrowers with non-traditional income sources
• Swift approval and funding of construction schedules (in several days, not weeks)
• Less stringent qualification standards.

Benefits of Private Lending

For Borrowers

• Speed and Accessibility: When Jane, a small business owner in Toronto, needed to close on an investment property within two weeks, her bank was unable to process the application in time. A private lender approved her private mortgage in three days. That’s the power of speed in private lending.
• Flexible Qualification: Private capital financing in Ontario does not comply with the same strict formulas as traditional bank financing. Private lending is more available to self-employed individuals, those with credit problems, newer immigrants, or investors with multiple mortgages. The focus shifts from your credit score to your property.
• Creative Solutions: Need to consolidate high-interest debt? Planning major renovations? Facing a power of sale deadline? Private lenders can structure residential and commercial private mortgages to address unique situations that don’t fit the bank’s standard checkbox.
• Bridge Financing: Consider Michael, who found his dream home before selling his current property. Short-term bridge financing in Ontario allowed him to secure the new property without losing it to another buyer. Once his original home was sold, he refinanced with a traditional mortgage.

For Lenders

• Private lending offers investment opportunities with tangible security. Unlike stocks or bonds, your investment is secured by real property. Various advanced investors also invest in Mortgage Investment Corporations, which consolidate funds to gain multiple defaults in various mortgages with tax benefits included.

Risks and Considerations for Borrowers

Let’s be honest, private mortgage lending isn’t without risks, and understanding them protects you from costly mistakes.

1. Higher Costs

The rate of interest on the private mortgages is usually between 8 and 12 percent, compared to the traditional mortgages, which are at present between 5 and 6 percent. There are also the mortgage arranging fees charged by the lenders (usually 1-3 percent of the loan amount). These costs are rapidly accrued over a period of one year.

 

Illustration: On a $200,000 private mortgage at 10% interest for one year, you’ll pay approximately $20,000 in interest alone, plus potential arrangement fees of $2,000-$6,000. Compare this to a bank mortgage at 6%, where the interest would be $12,000 with minimal fees.

2. Short Repayment Terms

Most private mortgages in Ontario have terms of 1-2 years, meaning you’ll need an exit strategy. Will you refinance with a traditional lender? Sell the property? Renew with the private lender? Without a clear plan, you could face difficulty when the mortgage matures.

 

A cautionary tale comes from Albrecht v. 1300880 Ontario Inc., 2024 ONSC 3328 (CanLII)¹, where a borrower defaulted on a private second mortgage in 2011. Still, the lender failed to take enforcement action for over ten years. The Ontario Superior Court held that the claim of the lender was barred by statute under the Real Property Limitations Act, which provides a time limit of ten years. The case confirms the importance of the fact that both sides need to be aware of their rights and duties; borrowers should not think that it is possible to do nothing and expect the lender to forgive them, and lenders have to work within the legal time frame.

3. Legal Complexity

In 660 Sunningdale GP Inc. v. First Source Mortgage Corporation, 2024 ONCA 252 (CanLII)², the Ontario Court of Appeal looked into the issue, i.e., whether lender fees in individual mortgages can be seen as unenforceable penalties. The court affirmed a 2.75% fee of facilitation, which the borrower did not even use the loan, saying that the fees are not obtained when the contract is not violated. This highlights why legal review of private lending agreements is crucial; the contracts are enforceable, and terms matter.

4. Risk of Losing Your Property

Private mortgages are secured against your property. Default can lead to power of sale proceedings much faster than with traditional lenders. Recent trends indicate an increasing volume of power of sale proceedings across Ontario, driven by rising interest rates, the maturity of private mortgages that borrowers can’t refinance, and broader economic uncertainty.

Private Lenders vs Traditional Lenders

How do private lenders compare with banks? Here’s a practical View:

Feature	Traditional Bank Lender	Private Mortgage Lender in Ontario
Approval process	Formal, lengthy employment verification, credit history, full appraisal, and internal credit committee.	Faster, fewer institutional constraints, may rely more on property value and exit strategy.
Interest/Fees	Generally lower, standardized.	Typically, an offer offers higher interest rates and a more flexible fee structure.
Term length	Often longer term (15-25 years for residential; 5-10+ years for commercial).	Often shorter term (6 months to 3 years), akin to short-term bridge financing in Ontario.
Flexibility	Less flexible; standard terms.	More customizable options include amortization, interest-only, balloon payments, and mixed security.
Regulatory oversight	Heavily regulated banks; consumer protections.	Subject to legislation (e.g., the Mortgages Act), but with less oversight; practices may vary widely.
Suitability	Good for stable borrowers with solid credit.	Ideal for borrowers with non-standard situations, including rapid turnaround projects, rehabilitation, refinancing, and alternative mortgage solutions.

In a case where a borrower requires flexible capital or a simple yes, the answer might be in private mortgage lending. However, it is essential to know the trade-offs. But knowing the trade-offs is vital. At Pacific Legal, we help you assess: Is the bank route possible? If not, are you prepared for the costs and risks associated with private lending? For lenders, we draft and negotiate documentation that ensures clarity of rights, protections, and enforceability of agreements.

Legal and Regulatory Considerations in Ontario

Understanding the regulatory framework protects all parties involved in private real estate lending in Ontario.

1. Mortgage Brokerages, Lenders and Administrators Act

In Ontario, individuals and businesses conducting mortgage brokering and administration activities must be licensed with the Financial Services Regulatory Authority (FSRA). This ensures consumer protection and professional standards.

 

When working with mortgage brokers to arrange private capital financing, verify that they hold valid licenses. The FSRA maintains a public registry that allows you to confirm your licensing status.

2. Interest Act (Federal)

The Federal Interest Act contains important protections. The landmark Supreme Court of Canada decision in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18 (CanLII)³, clarified that lenders cannot charge higher interest rates on money in arrears than on principal amounts not in arrears. This prevents lenders from using creative interest structures to impose penalties for default.

 

What this means practically: if your private mortgage has a 10% interest rate, the lender cannot charge more than 10% on missed payments. Section 8 of the Interest Act prohibits this practice to protect borrowers from having their equity eroded during financial difficulties.

3. Mortgage Priority and Construction Liens

The significance of the proper registration is underlined by the Courts in the recent cases of Ontario. In Kingsett Mortgage Corporation v. Mapleview Developments Ltd., 2024 ONSC 6477 (CanLII)⁴, the court reaffirmed that registered mortgages have priority over claims of liens that are unregistered. To safeguard the interests of borrowers and lenders, it is important that mortgages are registered in a timely manner.

4. FSRA Supervision and Compliance

The sector supervision plan of FSRA (2024-2025) includes private mortgages as a further focus since it reports that the risks of mortgage investment are not only high but also increase in the number of consumers resorting to alternative financing. The regulator is intensifying oversight of both brokerages and administrators who handle approximately $400 billion in mortgages for over 920,000 investments.

 

For borrowers, this increased oversight means better consumer protection. For lenders and brokers, it means strict compliance with disclosure requirements, suitability assessments, and governance standards.

How do Private Mortgages Work in Ontario?

The Typical Process

1. Initial Consultation

You visit a mortgage broker or get in touch with a personal mortgage lender in Ontario. They evaluate your circumstances, the value of the property and how you will finance. The focus of the conversation is less on your employment history than on the property and your exit strategy, unlike with banks.

2. Property Appraisal

The lender will instruct an independent appraisal to ascertain the current market value. Most private lenders will advance 65-75% of the appraised value (loan-to-value ratio) on first mortgages, or 75-85% of the appraised value plus any existing mortgage on second mortgages.

3. Approval and Terms

If approved, you’ll receive a commitment letter outlining:

• Loan amount
• Interest rate
• Term length
• Lender and broker fees
• Repayment terms
• Any special conditions

4. Legal Review

With this risk present, it is imperative to have an experienced counsel review the proposed transaction: confirm that there is enforceability, clarify rights, emphasize costs, confirm that there is no undue influence or unconscionability (additional difficulty dealing with transactions involving individuals), and that the documentation suits your plan.

5. Closing

When the terms are settled, the transaction closes. Private mortgages normally close much quicker than bank ones and may take 5 to 10 business days after approval.

6. Servicing and Repayment

You will pay periodically (usually with interest only) to the lender or his administrator. Maintain detailed records of all the payments. Communication is essential; if you predict that you will have a problem when paying, get in touch with your lender as soon as possible instead of defaulting on them.

Common Private Lending Scenarios

Scenario 1: Bridge Financing 

Robert needs to purchase a new home before selling his current property. In Ontario, a short-term bridge financing solution offers him the financing for the down payment, with his current home as security. He uses it to pay off the personal mortgage as soon as it sells.

Scenario 2: Credit Repair 

Bank approval of David is not possible because of his bankruptcy after the business went under. He buys a rental house using a private mortgage, and in two years, he pays regularly to restore his credit, then takes the mortgage with a conventional lender at reduced rates.

Scenario 3: Investment Property 

An experienced investor finds a property below market value that requires immediate purchase. Private lending provides rapid funding to secure the deal, with the intention of refinancing once renovations add value and bank financing becomes available.

Scenario 4: Debt Consolidation 

Jennifer has high-interest credit cards and lines of credit totalling $80,000. With $200,000 equity in her home, she uses a private second mortgage to consolidate debt, reducing her monthly payments while working to improve her credit for bank refinancing.

Practical Steps for Borrowers & Private Lenders

For Borrowers

Before Applying:

1. Assess Your True Needs: Calculate exactly how much you need and for how long. Borrowing more than necessary means paying unnecessary interest.
2. Develop Your Exit Strategy: How will you repay or refinance when the term ends? Be realistic, don’t assume property values will increase or your credit will dramatically improve without concrete steps.
3. Understand Total Costs: Factor in interest, lender fees, broker fees, legal fees, and appraisal costs. Calculate your true cost of borrowing.
4. Research Lenders: Not all private lenders are equal. Ask for references, verify licensing (for brokers), and understand their reputation.

During the Process:

1. Get Independent Legal Advice: Pacific Legal provides legal review of private lending agreements to protect your interests. This isn’t an area to cut corners; legal fees pale in comparison to the potential problems that can arise from poorly structured agreements.
2. Read Everything: Understand every clause in your mortgage agreement. If something seems unclear, ask questions until it makes sense.
3. Negotiate Terms: Private mortgages are often negotiable. Interest rates, fees, prepayment privileges, and renewal terms may have flexibility.
4. Record It All: Store copies of all deals, letters and receipts of payments so that everything is properly documented and they are not violated by any rules. In case of disagreements, you are covered by the documentation.

After Closing:

1. Make Payments Consistently: Even if making interest-only payments, never miss deadlines. Your property is at stake.
2. Start Exit Planning Immediately: Begin working on your refinancing or repayment strategy from the very first day. Waiting until maturity creates unnecessary stress and limits options.
3. Maintain Communication: If circumstances change, communicate proactively with your lender. Most prefer working with borrowers rather than pursuing enforcement.

For Private Lenders

Due Diligence:

1. Verify Property Values: Always order independent appraisals. Don’t rely solely on borrower representations or automated valuation models.
2. Title Search: Ensure the property has a clear title and understand any existing encumbrances. Priority matters significantly in mortgage enforcement.
3. Understand Borrower’s Situation: Why are they seeking private financing? Understanding their circumstances helps assess the likelihood of repayment.
4. Review Exit Strategy: How will the borrower repay you? Ensure their plan is realistic and achievable.

Structuring the Loan:

1. Conservative Loan-to-Value Ratios: Generally, loan-to-value ratios of 65-75% for first mortgages and 80-85% combined for second mortgages provide an adequate security cushion.
2. Clear Documentation: All the terms should be clearly written in the mortgage agreement, such as rates of interest, repayment periods, default conditions, and powers of enforcement.
3. Legal Guidance: Engage experienced legal counsel for legal review of private lending agreements. Properly drafted documents protect your security interest and clarify enforcement procedures. 
4. Consider Insurance: There are some lenders who acquire insurance coverage to cover certain risks. Consult legal and financial consultants.

Ongoing Administration:

1. Monitor Payments: Track payments carefully and follow up immediately on missed payments. The Albrecht case demonstrated that failing to enforce your rights within limitation periods can result in losing your claim entirely.
2. Frequent Property inspection: In case of a long-term mortgage, occasionally inspect the property to ensure that property taxes as well as insurance are paid.
3. Document Everything: Maintain complete records of all communications, payment histories, and any variations to original terms.

Compliance Considerations:

1. Understand Licensing Requirements: If you’re dealing in or administering mortgages in Ontario beyond occasional personal investments, you may require licensing under the Mortgage Brokerages, Lenders and Administrators Act. Consult with legal counsel to understand licensing requirements for private lenders in Ontario.
2. Interest Act Compliance: Be aware of the restriction on interest payable on arrears at a higher rate. Be careful in formulating your interest terms so that you do not come up with clauses that are not enforceable.
3. Stay Informed: Regulatory requirements evolve. Stay current with FSRA guidance and industry best practices to ensure compliance.

How Pacific Legal Can Help?

In Ontario, private lending has become a significant part of real estate financing, which provides a flexible source of capital where traditional lenders fail to provide. In case you are considering other mortgages, short-term bridge loans, or Mortgage Investment Corporations, it is important to know the legal regulations.

 

The private real estate loans provide alternatives that banks can hardly provide, but they have their own distinctive risks, costs and considerations. With proper legal counselling, due diligence and proper planning, private mortgages can guide you towards achieving your property and financial goals.

 

Pacific Legal is also prepared to go through your private lending agreements and provide you with the line-by-line advice that you need to be able to navigate the Ontario private lending environment. 

 

Contact us to discuss your unique situation and explore how we can protect your interests in any one-on-one mortgage transaction.

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