Private Mortgages in Ontario: Rules, Risks and Typical Terms

If banks have turned you down, a private lender can look like the only way forward. A private mortgage may fill that gap, but it usually comes with higher costs and a shorter runway, so it is worth understanding the legal terms before you commit.

This article explains what a private mortgage typically looks like in Ontario, the limits the law puts on interest, who is regulated, and the risks to weigh. It is general information, not advice on your own deal.

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, the end of the term matters as much as the start. FSRA says borrowers should have an exit strategy and consider independent legal advice before signing.

• How long the term is and what happens when it ends
• Whether payments are interest-only, so the balance does not fall
• Every fee, including lender fees, late fees and default charges
• What counts as default and what the lender can do about it
• Whether the loan sits behind another mortgage on the same home

Limits the law puts on interest

No fine, penalty or rate of interest may be charged on mortgage arrears that increases the charge on the arrears beyond the rate payable on principal not in arrears. Interest on arrears at a rate no higher than the mortgage rate is allowed.

For blended-payment or sinking-fund mortgages, no interest is recoverable unless the mortgage states the principal amount and the interest rate calculated yearly or half-yearly, not in advance. Where a mortgage term is longer than five years, the borrower may pay off the principal and interest plus three months' further interest after five years from the mortgage date. That right does not apply to a mortgage given by a corporation.

There is also a criminal ceiling. It is a criminal offence to enter into, offer, advertise or receive interest at a criminal rate, which is an annual percentage rate above 35 per cent on the credit advanced. Certain commercial loans to borrowers who are not natural persons are exempt under regulations in force January 1, 2025; one tier covers credit over $10,000 up to $500,000 at an APR not above 48%. If your borrower is a company, ask a lawyer which rule applies.

Who you are dealing with: licensing and disclosure

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, and 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, and it must get your written acknowledgement. These 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.

Risks if you fall behind

A mortgage is security over your home. If you default, the lender may be able to enforce through power of sale, and a lender selling this way must take reasonable precautions to obtain the true market value of the property as of the date of sale.

If the private loan is a second mortgage, you must keep paying the first mortgage too, and second-mortgage interest rates are usually higher because they are riskier for lenders. Under the Land Titles Act, a second charge ranks behind an earlier registered first charge, although priority can be changed by registering a postponement.

If you do fall into default, the law lets you stop the lender from enforcing the acceleration clause by paying the arrears and the lender's necessary expenses, despite any agreement to the contrary. Speak to a lawyer early, because options narrow as the process moves forward.

What to do next

• Check the broker's or agent's licence on FSRA's public listing.
• Ask for the written disclosures early, well before the signing date.
• Get every term in writing, including fees and the end-of-term plan.
• Have a lawyer review the mortgage before you sign.
• Work out how you will pay out or refinance when the term ends.

If something goes wrong with a broker, brokerages must have a process for resolving public complaints. FSRA expects you to complain to the brokerage first and get a written response before it will review the complaint. FSRA cannot relieve you of mortgage obligations, award compensation or decide contract disputes, though it can take regulatory action against a broker or agent who has not complied with the Act.

Frequently asked questions