How to Use Private Lending to Buy Your First Home in Canada: A Beginner’s Guide
Canadian private lending has surged by 45% in just 10 quarters. These loans now make up more than one in 10 Canadian mortgages.
The lending landscape shows a remarkable transformation. First-time homebuyers who struggle with traditional financing turn increasingly to private lenders. Private mortgage lenders' market share has doubled since 2015. They provide crucial support to buyers who have non-traditional income sources or limited credit history.
Private mortgage options could open the door to homeownership. This applies especially to self-employed individuals, people with unique income situations, or those who don't fit traditional lending requirements. These loans process faster and put more weight on your property's value than your credit score, though interest rates tend to be higher.
We created this piece to help you understand private lending in Canada better. You'll learn everything from finding trustworthy lenders to managing your private mortgage effectively.
What Is Private Lending in the Canadian Housing Market
Private lending stands out in Canada's mortgage world by offering financing beyond traditional banking. Many homebuyers turn to private lending as a viable option after conventional lenders reject them.
Definition and key characteristics of private mortgage lenders
Private mortgage lenders use their own money to provide loans instead of relying on depositor funds or government securities. These lenders work outside traditional financial institutions and create their own lending rules.
The main features of private mortgage lenders are:
- They look at the property's value and market potential more than credit history
- They give short-term solutions from 6 months to 2 years
- They provide interest-only loans where payments don't reduce the principal
- They can approve loans quickly, often within 24-48 hours
How private lending is different from traditional bank mortgages
Private lenders take a completely different approach than banks and credit unions (known as "A lenders"):
The approval process centers on the property's equity rather than your financial status. On top of that, it comes with much higher interest rates—often 10-18% compared to regular mortgage rates—because of the increased risk.
These mortgages also come with hefty fees between 1-3% of the total amount. Private mortgages rarely last beyond 2 years since they serve as temporary fixes.
Most private mortgages work as interest-only loans, so your regular payments won't decrease what you owe.
Types of private lenders in Canada
Canada's private lending market has several distinct groups:
- Individual investors: Friends, family members, or wealthy individuals who give direct loans
- Mortgage Investment Corporations (MICs): Companies that combine investor money to offer mortgages
- Private syndicates: Investor groups that fund loans together
- Private mortgage funds: Combined investment pools focused on mortgage lending
Each type brings different benefits based on your situation. In spite of that, you need proper legal help and a clear understanding of terms with any private lender you choose.
Determining If Private Lending Is Right for Your First Home Purchase
Are you looking at private lending to buy your first home? You need to figure out if this type of financing lines up with your plans and what you want to achieve as a homeowner.
Situations where private lending makes sense for first-time buyers
Private lending works best for first-time buyers in these cases:
- Your credit score is too low for regular banks
- Banks can't verify your income because you're self-employed or freelancing
- You need money fast for a quick purchase
- The property you want is too unique for regular bank financing
- Regular lenders turned you down because of the mortgage stress test
The Bank of Canada's research shows that more buyers now turn to private lenders because mortgage rules are tough. The new stress test makes getting a regular mortgage harder, primarily if you work for yourself or if you're buying your first home
Evaluating your financial readiness
Take a good look at your money situation before you jump into private lending. Private lenders care most about your property's value and where it's located. Your financial health comes second to them.
Most private lenders will give you 75-80% of what your property is worth. This means you'll need a big down payment or lots of equity to make your case stronger.
You'll need a solid plan to switch to regular bank financing within 1-2 years. Without this plan, you might get stuck paying expensive short-term mortgages over and over.
Understanding the true costs of private mortgage rates
Private mortgage rates run between 10% and 18%, based on your situation. This is a big deal as it means that they're much higher than regular mortgage rates because lenders take on more risk.
You'll also pay these extra costs:
- Lender fees around 2% of what you borrow
- Broker fees that add thousands to your bill
- Legal and paperwork costs
- Extra fees if you can't switch to regular financing
Most private mortgages only ask you to pay interest. Your loan amount stays the same even though you're making big monthly payments [12, 13].
Step-by-Step Process to Secure a Private Home Loan
Strategic planning and preparation are essential when dealing with private lending. Private mortgage providers work faster than traditional lenders and look at applications in a different way. Here's what you need to do to get a private home loan:
Finding reputable private mortgage lenders in Ontario and across Canada
A licensed mortgage broker is the most reliable way to find trustworthy private lenders. These brokers have connections with many private lenders and can match you with options that fit your situation.
You should check if your potential lender or broker has a valid license from the Financial Services Regulatory Authority of Ontario (FSRA) or your provincial regulatory body. This verification is vital since private lending markets don't have the same regulations as traditional banking.
Private mortgages make up nearly 8% of mortgages in Ontario. This creates a big marketplace with different levels of credibility and service.
Required documentation and application process
Private lending's application process is more efficient than traditional mortgages. Private lenders look at:
- Property value and location
- Amount of equity or down payment (you need 15-20% minimum)
- Exit strategy showing how you'll pay back the loan
Simple documentation needs identification, property details, and an appraisal from a lender-approved appraiser. Some private lenders don't need income verification, but showing proof of income might help you get better rates.
A credit check happens next, but private lenders don't focus on credit scores as much as traditional banks do.
Negotiating favorable terms and conditions
Knowledge of average rates helps set realistic expectations during negotiations. Right now, private lending rates usually range between 8-12%, and lending fees are 2-4%.
Your property's equity affects your negotiating power by a lot. Properties with loan-to-value ratios under 50% LTV in major cities get the lowest rates.
Getting multiple quotes from different lenders gives you an edge in negotiations. You can show competing offers to lenders for better terms. You might also want to ask for prepayment privileges, longer mortgage terms, or waived renewal fees.
Closing the deal: what to expect
Separate legal representation is needed for both you and the lender when private mortgages exceed certain amounts. This protects everyone involved in this largely non-regulated lending market.
Your lender gives the mortgage funds to your lawyer on closing day. You'll pay:
- Lender fees (1-3% of the loan amount)
- Legal fees for your lawyer and the lender's lawyer
- Broker commissions if applicable
This process moves much faster than traditional financing—sometimes taking just days instead of weeks. Your lawyer takes care of the final steps, registers the mortgage and gives you property documentation.
Managing Your Private Mortgage Successfully
Private lending success goes beyond securing the mortgage. Good management helps you build equity and eventually move to traditional financing.
Creating a payment strategy that builds equity
Most private mortgages work as interest-only loans, which means your regular payments don't reduce the principal. You can build equity through these strategies:
Note that you should think over making extra payments when your contract allows it. Many private mortgage agreements offer "prepayment privileges" that allow lump-sum payments or increased regular payments. Even small additional payments help cut down your principal faster.
Your accelerated payment options can make a big difference if available. Weekly or biweekly payments instead of monthly ones give you one extra monthly payment per year, which reduces interest costs by a lot.
Regular appraisals help track your home's value to build more equity. Your equity grows as you pay down your mortgage and your property value increases. This growing equity becomes a valuable financial asset you can use when refinancing.
Developing an exit plan to transition to traditional financing
Private mortgages need a solid exit strategy. FSRA Executive Vice President Huston Loke points out that private mortgages should serve as "a short-term solution" that typically lasts 1-2 years.
Your exit plan must detail how you'll enhance your financial position to qualify for conventional lending. Without this roadmap, you might get stuck in expensive private mortgage cycles, face higher renewal fees and possibly higher interest rates.
Your exit strategy might include:
- Refinancing through a traditional lender once your credit improves
- Selling the property (ideally not under duress)
- Using other financial resources to pay off the loan
Your property's current value and mortgage maturity date need close monitoring. Your exit strategy should adapt based on your financial situation changes or market conditions.
The best exit happens when you move to conventional financing. CMHC data reveals that 72% of alternative mortgage borrowers created effective exit strategies in 2020, and 64% secured conventional loans when their term ended.
Conclusion
Private lending creates a practical path to homeownership for people who can't access traditional financing. These loans cost more but offer quick approvals and flexibility that many first-time homebuyers find valuable.
Your success with private mortgages depends on smart planning and management. Extra payments help build equity while a solid exit strategy substantially increases your chances to transition into traditional financing. Recent numbers show that borrowers with clear exit plans move successfully to conventional mortgages.
Private lending works best as a stepping stone instead of a long-term solution. Market awareness and good financial habits will maximize your private mortgage's value. Our YouTube channel and social media platforms give great tips and expert advice to help you learn more about private lending strategies.
A clear plan and proper research make private lending an effective tool for homeownership. You can achieve your goals and move toward better financing options with the right approach and realistic expectations.
FAQs
How do private mortgage lenders differ from traditional banks in Canada?
Private mortgage lenders typically focus more on the property's value than the borrower's credit score. They offer faster approvals and shorter terms, usually 6 months to 2 years, with higher interest rates ranging from 10-18%. Unlike banks, private lenders often provide interest-only loans and can approve mortgages within 24-48 hours.
What situations make private lending a good option for first-time homebuyers?
Private lending can be suitable for first-time buyers with credit challenges, self-employed individuals with irregular income, those needing quick financing for time-sensitive purchases, or buyers interested in unique properties that conventional lenders won't finance. It's also an option for those rejected by traditional lenders due to strict mortgage qualification rules.
What are the typical costs associated with private mortgages in Canada?
Private mortgage rates generally range from 10% to 18%. Additional costs include lender fees (around 2% of the mortgage amount), broker fees, legal and administrative fees, and potential renewal fees. Many private mortgages are interest-only loans, meaning that regular payments don't reduce the principal balance.
How can I find reputable private mortgage lenders in Canada?
Working with a licensed mortgage broker is often the most reliable way to find reputable private lenders. Ensure any potential lender or broker holds a valid license from your provincial regulatory body, such as the Financial Services Regulatory Authority of Ontario (FSRA). It's crucial to verify credentials, as private lending markets are less regulated than traditional banking.
What should be included in an exit strategy for a private mortgage?
An effective exit strategy should outline how you'll improve your financial situation to qualify for conventional lending within 1-2 years. This may include plans to refinance through a traditional lender once your credit improves, selling the property, or using other financial resources to pay off the loan. Regularly review and adjust your strategy based on changes in your financial circumstances or market conditions.