Private Mortgages in Ontario

A private mortgage is a loan secured against real estate and provided by a private individual, company, mortgage investment corporation, or another non-traditional lender.

Private mortgage financing may be used for a property purchase, mortgage refinancing, debt consolidation, short-term financing, or circumstances where a borrower does not qualify for conventional financing through a bank or credit union.

Nobari Law Professional Corporation provides legal assistance with private mortgage transactions for borrowers and lenders in Ontario, subject to conflict and professional-responsibility requirements.

A private mortgage is registered against real estate as security for money advanced by a private lender.

Private mortgages may be arranged through:

• an individual lender;
• a private company;
• a mortgage investment corporation;
• a family member, friend, or business associate; or
• another private lending source.

The mortgage may be registered as a first, second, or later-ranking mortgage, depending on the existing registrations against the property and the terms approved by the lender.

Private mortgage terms can vary considerably. They are commonly structured as shorter-term financing and may involve higher interest rates, lender fees, commissions, and interest-only payments compared with conventional bank financing.

A private mortgage may be considered where a borrower:

• has difficulty qualifying through a bank or credit union;
• has a lower credit score or limited credit history;
• has income that is irregular, self-employed, or difficult to verify;
• requires short-term financing;
• needs to complete a purchase within a limited timeframe;
• wishes to consolidate debts using available property equity;
• requires funds for renovations, investments, or another purpose;
• is waiting for another property to sell;
• intends to improve their financial circumstances before applying for conventional financing; or
• requires a mortgage that does not fit a traditional lender’s requirements.

Private lenders may place significant emphasis on the property’s value and available equity. However, the borrower should still consider whether the payments, fees, and repayment obligations are manageable.

Private mortgages are commonly intended to provide temporary financing for a relatively short period, often until the borrower can sell the property, improve their credit or income, or qualify for lower-cost institutional financing. 

Before entering into the mortgage, a borrower should have a realistic plan for repaying or replacing it at the end of the term. This is sometimes referred to as an exit strategy.

An exit strategy may involve:

• refinancing through a bank, credit union, or alternative lender;
• selling the property;
• using funds expected from another transaction;
• reducing debt and improving credit; or
• repaying the mortgage from another identified source.

A private lender is not required to renew or extend the mortgage when the term ends unless the mortgage documents provide otherwise.

Before signing a private mortgage commitment, the borrower should understand:

• the principal amount being advanced;
• the interest rate;
• whether payments include principal or are interest-only;
• the length of the mortgage term;
• the payment frequency and due dates;
• lender and brokerage fees;
• legal fees and disbursements;
• appraisal and title-insurance requirements;
• prepayment rights and penalties;
• renewal or extension fees;
• default interest and late-payment charges;
• property-insurance and maintenance requirements;
• whether other debts must be paid from the mortgage advance;
• the amount the borrower will actually receive after deductions; and
• what happens if the mortgage cannot be repaid when due.

Private mortgage contracts may include additional fees, conditions, or restrictions. Borrowers should read the documents carefully and ask questions before signing because the agreement may become legally binding once accepted.

The costs of private mortgage financing may include:

• interest;
• lender fees;
• mortgage brokerage fees or commissions;
• the lender’s legal fees, where payable by the borrower under the commitment;
• the borrower’s legal fees;
• appraisal fees;
• title-insurance premiums;
• title-review and registration expenses;
• mortgage-discharge costs;
• renewal or extension fees;
• late-payment or default charges; and
• other expenses identified in the mortgage commitment.

The gross mortgage amount is not necessarily the amount the borrower will receive. Fees, legal expenses, existing mortgage payouts, property-tax arrears, and other required payments may be deducted from the advance before the remaining proceeds are released.

Borrowers should understand the full cost of private financing, including fees charged when the mortgage is arranged, during its term, if it is renewed or extended, and when it is paid out and discharged.
 

A private borrower and lender have different legal and financial interests. Nobari Law will confirm which party it is able to represent after reviewing the transaction and completing a conflict check.

Separate representation or independent legal advice may be required for the borrower, lender, guarantor, spouse, co-owner, or any person postponing an interest. The services included in the legal retainer will be confirmed in writing.

Mortgage priority generally refers to the order in which registered mortgage lenders have security against the property.

For example:

• a first mortgage is generally registered ahead of later mortgages;
• a second mortgage is registered behind the first mortgage; and
• a third or later mortgage ranks behind the mortgages registered before it.

The ranking can affect the lender’s security and the order in which proceeds may be applied if the property must be sold. Priority may also be affected by postponements, statutory claims, construction liens, property taxes, and other legal considerations.

The lender’s lawyer reviews relevant registered information and the proposed mortgage position before registration.

A private mortgage may be registered behind an existing mortgage or may be used to pay out and replace existing financing.

Where a prior mortgage must be paid, the lawyer will generally obtain a payout statement showing the amount required. The payout may include:

• outstanding principal;
• accrued interest;
• prepayment penalties;
• discharge fees;
• secured line-of-credit balances; and
• other lender charges.

Paying the debt does not automatically remove the mortgage from title. The prior lender must also provide or register the appropriate discharge.

A private lender may require an appraisal to assess the property’s current value and the available equity.

An appraisal is prepared by an appropriate qualified professional and is not provided by Nobari Law Professional Corporation.

The lender should consider:

• the appraised value;
• the balance and priority of existing mortgages;
• property taxes and condominium arrears;
• the proposed mortgage amount;
• the condition and marketability of the property; and
• the costs that may arise if enforcement becomes necessary.

The legal work completed for the mortgage transaction does not assess the property’s physical or environmental condition, determine its market value, or predict its future resale prospects. Any inspection, environmental assessment, or appraisal must be obtained from an appropriately qualified professional.

The lender will generally require the property to remain adequately insured during the mortgage term.

The insurance policy may need to identify the private lender as a mortgagee or loss payee. Evidence of insurance may be required before the lender releases the funds.

The borrower should maintain the required coverage and advise the insurer of the mortgage arrangements.

Once the legal requirements and lender conditions have been satisfied, the private mortgage transaction may proceed.

On closing, the lawyers may:

• receive the lender’s funds;
• register the mortgage against the property;
• pay out existing mortgages or required debts;
• pay lender, brokerage, legal, and other authorized costs;
• hold back funds required to address an outstanding matter;
• disburse the remaining proceeds according to the lender’s instructions and the borrower’s written directions; and
• report to their respective clients.

A private mortgage does not automatically renew at the end of its term.

If the borrower requires additional time, the lender may agree to an extension or renewal, but may impose:

• a new interest rate;
• a renewal or extension fee;
• updated appraisal or legal requirements;
• additional payments;
• changes to the mortgage terms; or
• other conditions.

The borrower should contact the mortgage broker, lender, and lawyer well before the maturity date. Leaving renewal arrangements until the mortgage has already matured may create additional costs and uncertainty.

A private mortgage is a legally binding loan secured against the borrower’s property.

Default may occur if the borrower fails to:

• make a required payment;
• repay the mortgage at maturity;
• maintain property insurance;
• pay property taxes;
• keep another mortgage in good standing;
• maintain the property as required; or
• comply with another material mortgage obligation.

The mortgage documents may permit the lender to charge additional interest and fees or take enforcement steps, including a power of sale. Before entering into a private mortgage, borrowers should understand what may happen if a payment is missed, the mortgage is not repaid at maturity, or replacement financing cannot be obtained.

Legal services relating to mortgage enforcement, default, or power-of-sale proceedings are separate from the legal work involved in preparing and closing a private mortgage transaction.
 

A borrower may be asked to provide:

• valid government-issued identification;
• the property address;
• the signed mortgage commitment;
• mortgage broker or agent contact information;
• a recent property-tax bill;
• condominium information, where applicable;
• existing mortgage and secured line-of-credit statements;
• property-insurance information;
• marital-status information;
• details of any judgments, liens, arrears, or other title concerns; and
• written directions regarding the permitted use of any remaining mortgage proceeds.

Additional information may be required depending on the property, lender, mortgage position, and purpose of the financing.

A private lender may be asked to provide:

• valid government-issued identification;
• the signed mortgage commitment or lending instructions;
• the amount being advanced;
• the source of the mortgage funds;
• instructions concerning interest, payments, maturity, and fees;
• the required mortgage priority;
• appraisal information;
• instructions concerning title insurance;
• information about any mortgage broker or administrator; and
• the funds required to complete the transaction.

Additional due diligence and record-keeping requirements may apply depending on the lender, source of funds, mortgage structure, and parties involved.

Do not send original documents, identification, complete account numbers, passwords, or other sensitive information unless requested by Nobari Law Professional Corporation. If requested, please follow the document-sending instructions provided by the firm.

Nobari Law Professional Corporation provides legal assistance with private mortgage transactions in Ontario.

Subject to conflict and professional-responsibility requirements, our services may include:

• representing either a borrower or private lender;
• reviewing the mortgage commitment and legal documents within the scope of the retainer;
• reviewing relevant registered information and the proposed mortgage position;
• preparing or reviewing and registering mortgage documents, as applicable;
• obtaining payout information and arranging required payouts or discharges;
• communicating with the other lawyer, mortgage professional, insurer, and other parties;
• completing the mortgage closing and disbursing funds in accordance with written instructions; and
• reporting to the client after completion.

The availability and scope of representation will depend on the parties, the transaction, and the services included in the retainer. Mortgage brokerage, appraisal, investment, accounting, tax, and financial advice should be obtained from appropriately qualified professionals.

Private mortgage transactions can involve significant legal obligations, costs, and risks for both borrowers and lenders.

Contact Nobari Law Professional Corporation to discuss legal representation for a private mortgage transaction in Ontario.