A Family Loan, Almost Undocumented: A Private Second Mortgage

The situation

Khalil, a technology executive, had found a condominium unit in Elliot Lake he wanted to buy for roughly $1,900,000. He had savings of about $350,000 and a mortgage pre-approval from his bank for approximately $1,150,000, based on his income and the appraised value of the property. That left a gap of about $400,000 between what he could put down and borrow, and what he needed to close.

His aunt, Rania, owns several franchise locations and had the funds available. She offered to lend Khalil the $400,000 shortfall directly, secured against the property, rather than have him take on a second loan from a stranger at a higher rate. The two of them had already shaken hands on the idea before either called a lawyer: Rania would lend the money, Khalil would pay her back over time, and they would sort out the paperwork later. Rania came to Treadstone Law about two weeks before the scheduled closing date to have the loan documented.

What almost went wrong

A private mortgage between family members carries real risk precisely because it feels informal. Nothing about the arrangement Khalil and Rania described would have held up cleanly if anything went sideways later — if Khalil missed payments, if he later sold the property, if he married and separated, or if Rania's own affairs changed and she needed the money back sooner than planned.

Three problems stood out immediately. First, an unregistered loan against a property gives the lender no priority claim if the borrower defaults or another creditor moves against the property; without registration on title, Rania would simply be an unsecured creditor competing with everyone else. Second, Khalil's bank had no idea a second loan was coming. Most residential mortgages contain a clause restricting the borrower from placing additional financing on the property without the primary lender's consent, and lenders take this seriously because a second mortgage changes their risk if the borrower defaults. Discovering an undisclosed second mortgage after closing can trigger a default under the first mortgage. Third, family loans carry a tax and paperwork wrinkle: an interest-free or below-market loan between relatives can later be characterized as a gift rather than a genuine debt, which matters both for how it is taxed and for whether it can actually be enforced as a loan. Setting a real interest rate, documenting it in writing, and having Khalil actually make the payments avoids that ambiguity.

None of this was fatal. It just meant the loan needed to be treated as a real mortgage, not a family favour, with about two weeks to get it done before closing.

What we did

1. Confirmed the bank's consent requirements first. Before drafting anything, our team contacted the bank's solicitor to find out what the first mortgage actually required for a second loan to be permitted. Most lenders will allow a subordinate private mortgage as long as it is properly disclosed and postponed in priority to their own security. Waiting until after closing to raise this would have risked a default under the first mortgage.
2. Arranged independent legal advice for Khalil. Because Khalil was borrowing from a family member and both sides had been dealing informally, we required him to get independent legal advice from a separate lawyer, Halima, before signing anything. This protects both of them: it reduces the risk that Khalil could later argue he did not understand the terms he agreed to, and it protects Rania's ability to enforce the loan if the relationship ever became strained.
3. Drafted the mortgage and a promissory note with commercial terms. We prepared a formal mortgage document to be registered on title, along with a promissory note setting out the principal, interest rate, payment schedule, and what happens on default or on an early sale of the property. Rania initially wanted the flexibility to demand repayment at any time, similar to how she might treat a loan to her business. We explained that a demand structure would likely be unacceptable to the bank, since it introduces uncertainty about when a competing claim on the property could arise, and would also complicate Khalil's ability to plan around a fixed obligation.
4. Negotiated a postponement and priority agreement with the bank's solicitor. This document formally confirmed that Rania's second mortgage would rank behind the bank's first mortgage in priority, and set out how each lender's rights interact if Khalil ever defaults. The bank's solicitor pushed for the second mortgage to include a standstill period, meaning Rania would need to notify the bank and wait before taking enforcement action if Khalil missed payments, so the bank could act first.
5. Set the interest rate to satisfy both the tax rules and Rania's expectations. We set the loan at a genuine market-comparable fixed rate, payable on a set schedule, with the terms and the actual payments documented so the arrangement would hold up as a real loan rather than an informal gift.
6. Registered the second mortgage on closing day, alongside the first. Both mortgages were registered on title in the correct order, with the postponement agreement registered to confirm priority, so there was no window where the property sat unencumbered or where priority was ambiguous.

The outcome

The purchase closed on schedule. Khalil got the home, Rania's $400,000 was properly secured as a registered second mortgage, and the bank's first mortgage was undisturbed. But it was a negotiated result, not the deal either side originally pictured.

Rania gave up the flexibility she wanted. Instead of being able to call the loan back on short notice if her own business needs changed, she agreed to a five-year fixed term with a standstill period favouring the bank if Khalil ever defaulted. That meant her $400,000 was effectively locked in for five years unless Khalil chose to prepay it. She also had to charge and collect real interest rather than treating it as a no-cost family favour, which changed how the arrangement felt to both of them even though it protected her legally.

Khalil, for his part, got independent legal advice from Halima that he had not planned to pay for and had to accept a repayment schedule with real consequences for missed payments, rather than the loose understanding he and his aunt had started with. He also learned, through his own lawyer, that if he and a future spouse separated, the debt to his aunt would need to be accounted for as a liability against the property in any division of family property, which was not something he had thought through before.

Both of them got what mattered most: a closing that happened on time, and a loan that will actually hold up if anything changes in either of their lives over the next five years. Rania has said since that she would still lend to family again, but never without this kind of paperwork. She has already told her own children that if they ever ask her for a similar loan, the first call will be to a lawyer, not the last.

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