Private Mortgages in Ontario: What to Know Before Borrowing

If a bank has turned you down, a private lender can look like the only way forward. Private mortgages can fill a gap, but they usually come with higher costs and less room for error, so it pays to slow down before you sign.

This article explains what a private mortgage generally involves, which rules protect borrowers in Ontario, and what to check first. Your own terms matter a great deal, so a lawyer can confirm how they apply to you.

What a private mortgage usually looks like

FSRA says private mortgages are generally a short-term option, often for one or two years. They are often interest-only, and fees are often higher than for a traditional mortgage.

Private lenders may also charge fees for late payments, lapsed insurance or property upkeep. Because the term is short, you will need a plan for what happens at the end. FSRA tells borrowers to have an exit strategy.

Costs and limits on interest

A second mortgage is a second loan secured on your home. You must keep paying the first mortgage too, and second-mortgage interest rates are usually higher because they are riskier for lenders. When you borrow against home equity, your home is the security, and if you cannot repay you may lose it through foreclosure.

• Interest on arrears cannot be charged at a rate higher than the rate payable on principal not in arrears.
• For blended-payment or sinking-fund mortgages, no interest is recoverable unless the mortgage states the principal amount and the yearly or half-yearly interest rate.
• Charging interest at an annual percentage rate above 35 per cent on the credit advanced is a criminal offence.

There is an exception for business loans. Certain commercial loans to borrowers who are not natural persons are exempt, and one tier covers credit over $10,000 up to $500,000 at an APR not above 48%. If a corporation is the borrower, ask a lawyer how this applies.

Check who you are dealing with

Mortgage brokerages, brokers, agents and administrators in Ontario are licensed by FSRA under the Mortgage Brokerages, Lenders and Administrators Act, 2006. You can check a licence on FSRA's public listing, which FSRA says is more reliable than a printed licence. You may not be protected if you deal with unlicensed people.

A brokerage must take reasonable steps to make sure any mortgage it presents is suitable for your needs and circumstances. It must disclose material risks in writing, disclose its relationship with each lender, and disclose any actual or potential conflict of interest. It must also get your written acknowledgement.

Timing and your rights if things go wrong

Required brokerage disclosures must be made at the earliest opportunity and no later than two business days before you sign the mortgage agreement or instrument, whichever comes first. If you are handed documents and told to sign today, treat that as a warning sign.

If you have a complaint, FSRA expects you to complain to the brokerage first and get a written response before FSRA will review it. FSRA cannot relieve you of mortgage obligations, award compensation or decide contract disputes.

If you fall behind, a lender with a power of sale clause cannot give notice of sale until the default has continued for at least 15 days. Default can still put your home at risk, so private lending is not something to enter lightly.

• The lender cannot sell until at least 35 days after the notice of sale is given.
• The notice of sale must go to every person having an interest in the property, and it must be in Form 1, Notice of Sale under Mortgage.
• Despite any agreement to the contrary, you can stop the lender from enforcing an acceleration clause by paying the arrears and the lender's necessary expenses, but once the power of sale closes this right no longer applies and you are limited to a claim for damages against the lender.
• You can give written notice requiring a statement of the arrears and expenses, and the lender must answer within 15 days.
• A lender selling under power of sale must take reasonable precautions to obtain the true market value of the property.
• A spouse with a right of possession in the matrimonial home, but no ownership interest, is entitled to the same notice of the lender's claim as the owner-spouse.

What to do next

• Check the broker's or agent's licence on FSRA's public listing.
• Ask for all disclosures in writing, and ask the brokerage to provide them early enough that they are in your hands at least two business days before you sign.
• Work out the total cost: interest, lender fees, broker fees and penalties for late payment.
• Write down your exit plan for the end of the term.
• Consider independent legal advice before you sign, which FSRA says borrowers should think about.

Frequently asked questions