A private mortgage can be a useful bridge or a costly trap. Here are the five things to understand before you borrow or lend — written for both sides of the deal.
Who this is for & what you'll get. Ontario homeowners or buyers considering borrowing privately, and individuals thinking about lending money secured by real estate. You'll learn what a private mortgage is, who uses one, how priority works, the key terms and costs, the legal requirements, the risks for each side, and what your lawyer does — plus a due-diligence checklist and a mini-FAQ.
⚖️ This is a general guide, not legal advice. It can't account for your specific situation. Use it to get oriented, then confirm the details with a licensed Ontario lawyer.
The 5 things to understand
1. What a private mortgage actually is
A mortgage is a loan secured against real estate: the borrower gets money and the lender gets the right to be repaid, with the property as collateral registered on title. A private mortgage is simply one where the lender is not a bank or major institution — it's an individual, a group of investors, a mortgage investment entity, or a company, usually arranged through a mortgage broker.
The legal mechanics are the same as a bank mortgage — it's a registered charge on title, governed in Ontario by the Mortgages Act — but the terms, pricing, and risk appetite are very different.
💡 Think of it as the same legal tool (a charge on the house) held by a different kind of lender, on different terms.
2. Who uses one — and why
Borrowers turn to private mortgages when banks say no or can't move fast enough:
- Self-employed or new to Canada, with income that's hard to document the bank's way.
- Bruised credit, prior arrears, or a recent power-of-sale scare.
- Need to close fast, bridge a short gap, or stop a default while they reorganize.
- Unusual properties banks dislike (rural, mixed-use, in poor condition).
Lenders lend privately to earn a return: interest rates higher than a savings account or GIC, secured against real estate. The trade-off is real risk and active work to protect the investment.
⚠️ A private mortgage is usually a short-term, higher-cost solution, not a permanent one. Most borrowers should treat it as a bridge to a plan (improve credit, sell, refinance to a bank) — and should know what that exit is before signing.
3. First vs. second mortgage — and why priority matters
A property can carry more than one mortgage. Priority (rank) decides who gets paid first if the property is sold or enforced:
- A first mortgage ranks ahead of everything registered after it. If the property is sold under power of sale, the first mortgagee is paid first from the proceeds.
- A second mortgage (and any beyond) sits behind the first. The second lender is only paid after the first is fully satisfied — so there must be enough value left over.
Private lenders frequently hold second mortgages behind a bank's first. That's riskier (less cushion if values fall), which is part of why second-mortgage rates and fees run higher. Priority is generally set by the order of registration on title — and can be adjusted by agreements between lenders.
4. The key terms — read every one
| Term | What it means | Why it matters |
|---|---|---|
| Interest rate | The cost of the loan, per year | Private rates are typically higher than bank rates — confirm the exact rate and how it's compounded |
| Term | How long the loan runs (often short — e.g., months to a couple of years) | At term's end you must repay or renew; have an exit plan |
| Loan-to-value (LTV) | The loan amount as a % of the property's value | Lenders cap LTV to keep a cushion; lower LTV = more protection for the lender |
| Lender / broker fees | Upfront fees, often deducted from advance | Can be significant — ask for the net amount you'll actually receive |
| Interest-only payments | You pay interest, not principal, during the term | Lower monthly cost, but the full principal is still owed at the end |
| Prepayment terms | Whether/how you can pay it off early, and any penalty | Affects your ability to refinance out |
| Default rate & charges | Higher rate / costs if you miss payments | Read these — they're where a manageable loan turns expensive fast |
💡 Always ask the borrower's two questions: "What's the total cost if I keep this for the full term?" and "What exactly do I have to do to get out of it?"
5. The legal requirements and protections
Ontario law builds in some guardrails — use them:
- Independent Legal Advice (ILA). Lenders almost always require — and borrowers should always get — separate lawyers. Each side needs its own lawyer so no one can later claim they didn't understand the deal. For some borrowers (e.g., guaranteeing someone else's loan, or vulnerable circumstances), ILA isn't just wise, it's expected.
- Registration on title. The mortgage must be properly registered as a charge in Ontario's electronic land registration system to secure the lender's priority. An unregistered or sloppily registered mortgage is a serious problem for the lender.
- Enforcement under the Mortgages Act. If the borrower defaults, the lender's main remedy is power of sale (covered in our power-of-sale guide), which requires giving the borrower statutory notice and a chance to cure before selling. There are strict steps; lenders who cut corners get into trouble.
- Disclosure and cost-of-borrowing rules apply to mortgage transactions; brokers in Ontario are regulated. Borrowers are entitled to clear disclosure of rates and fees.
The risks — for each side
For borrowers
- Higher cost. Rates and fees exceed bank financing; the convenience and speed aren't free.
- Short term, hard deadline. If you can't repay or refinance when the term ends, you can fall into default — and into power of sale.
- Fees eat the advance. Upfront fees deducted from the loan mean you receive less than the face amount.
- Default spirals. Missed payments can trigger default rates and enforcement quickly.
For lenders
- Borrower default and the cost/time of enforcing power of sale.
- Insufficient equity, especially behind a first mortgage, if values fall.
- Title and fraud risk — undisclosed prior charges, identity or property fraud, or a borrower who isn't who they claim.
- Property risk — condition, insurance lapses, unpaid property taxes that can rank ahead of the mortgage.
- Regulatory missteps in setting up or enforcing the loan.
What your lawyer does
For a private mortgage, the lawyers do a lot of the heavy lifting that keeps everyone safe:
For the lender's lawyer
- Searches title to confirm ownership and what's already registered (existing mortgages, liens, executions).
- Confirms priority and the loan structure (first/second, LTV).
- Prepares and registers the charge correctly on title.
- Arranges title insurance for the lender where appropriate.
- Confirms property tax status and insurance.
- Handles the advance of funds and a proper statement of what's being lent and deducted.
For the borrower's lawyer (ILA)
- Explains the rate, fees, term, and net amount the borrower will actually receive.
- Flags the default and enforcement consequences in plain language.
- Confirms the borrower understands and signs voluntarily.
- Provides an ILA certificate the lender requires.
Due-diligence checklist
Borrowers, before you sign:
- Do I have a clear exit plan (sell, refinance, improved credit) before the term ends?
- What is the net amount I'll receive after fees?
- What's the total cost over the full term, and the cost to pay it off early?
- What happens on default — the default rate, charges, and timeline to power of sale?
- Have I received independent legal advice from my own lawyer?
Lenders, before you fund:
- Have I confirmed the property's value and set a conservative LTV?
- Has a lawyer searched title and confirmed my priority?
- Is the charge being properly registered and is title insurance in place?
- Are property taxes current and is the property insured (with me noted)?
- Have I verified the borrower's identity and guarded against fraud?
- Do I understand the cost and process of enforcing if the borrower defaults?
Mini-FAQ
Are private mortgage interest rates regulated? Mortgage transactions are subject to cost-of-borrowing disclosure rules, and there are general legal limits on interest. But private rates are typically much higher than bank rates — confirm the exact rate and all fees, in writing, and verify current rules with a lawyer rather than assuming a cap protects you.
Do I really need my own lawyer if the lender has one? Yes. The lender's lawyer acts for the lender. Borrowers should get independent legal advice from their own lawyer — it's usually required and it protects you.
What happens if I can't repay at the end of the term? You'd typically try to refinance or sell. If you can't, the lender can enforce — usually by power of sale under the Mortgages Act, after giving you statutory notice and a chance to cure. That's why an exit plan matters from day one.
Is a private mortgage a good idea? It can be a sensible bridge for the right borrower with a clear exit — and a reasonable secured investment for a careful lender. It's rarely a good long-term arrangement. Get advice tailored to your numbers.
How Treadstone Law can help
Whether you're borrowing privately to get a deal done or lending money secured against real estate, the paperwork and the protections matter enormously. We act for borrowers and lenders on private mortgages — searching title, confirming priority, registering the charge, arranging lender title insurance, and providing independent legal advice — all at transparent flat fees.
- Mortgage and real estate services across Ontario — see treadstonelaw.ca/real-estate and treadstonelaw.ca/pricing.
- Start your file online at treadstonelaw.ca/start-file, or call 1-844-900-1070.
- Fully virtual, province-wide, from our Mississauga office.
This is not legal advice
This guide is general information, not legal advice. Reading it does not create a lawyer-client relationship. Ontario laws, tax rates, and government programs change, and how the law applies depends on your specific facts. For advice about your situation, speak with a licensed Ontario lawyer. Treadstone Law is licensed by the Law Society of Ontario — reach us at 1-844-900-1070 or start a file online.