Private Mortgages in Ontario: What Borrowers Need to Know

A bank has turned you down, and now a broker or private lender is offering you a mortgage. It may feel like a lifeline, but the terms of a private mortgage can be very different from what you would get at a bank.

This article explains what private mortgages usually look like in Ontario, the protections the law provides, and the red flags to watch for before you sign.

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, fees are often higher than for a traditional mortgage, and private lenders may charge fees for late payments, lapsed insurance or property upkeep.

Because the term is short, the main question is how you will pay off or replace the loan when it ends. FSRA says borrowers should have an exit strategy and consider independent legal advice before signing.

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, and you may not be protected if you deal with unlicensed people.

Federally regulated banks are treated differently from private lenders for hardship relief. The federal expectations of tailored relief for borrowers at risk of default apply to banks and other federally regulated lenders, and only to an existing residential mortgage on a principal residence. Do not assume a private lender will offer the same flexibility.

What a brokerage must do for you

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. If you are pressed to sign the same day, treat that as a warning sign.

Brokerages must have a process for resolving public complaints, designate people to handle them and keep records. 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.

Limits on interest and charges

• No fine, penalty or rate of interest charged on mortgage arrears may increase the charge on the arrears beyond the rate payable on principal not in arrears.
• It is a criminal offence to enter into, offer, advertise or receive interest at an annual percentage rate above 35 per cent on the credit advanced.
• Certain commercial loans to borrowers who are not natural persons, such as corporations, are exempt from that limit under separate regulations, so the exemption does not cover a private mortgage you take out personally.
• For a mortgage longer than five years, a borrower may generally pay off the principal and interest plus three months' further interest after five years, but this right does not apply to mortgages given by corporations.

Whether a particular charge or fee is lawful depends on how it is structured, so have the numbers reviewed before you agree.

If you fall behind

Where a mortgage contains a power of sale, the lender cannot give notice until the default has continued for at least 15 days and cannot sell until at least 35 days after the notice is given. The notice goes to every person with an interest in the property.

Before the power of sale closes, you can stop the lender from enforcing an acceleration clause by paying the arrears and the lender's necessary expenses. Once the sale has closed, that right no longer applies, and you are limited to a claim for damages against the lender. You may also require a written statement of arrears, which the lender must provide within 15 days. A lender selling under power of sale must take reasonable precautions to obtain true market value. A lender's claim for a shortfall after a sale must be started within the later of 10 years after the cause of action arose and 10 years after the liable person's interest in the land was conveyed.

What to do next

• Look up the broker or brokerage on FSRA's public listing.
• Ask for all disclosures in writing, and check that they were made no later than two business days before you sign.
• Add up every fee, including late, insurance and upkeep charges.
• Write down your exit plan and the date the term ends.
• Have a lawyer review the commitment and mortgage before you sign.

Frequently asked questions