Private & Second Mortgages

A private or second mortgage is a short-term tool. It solves a problem a bank will not solve this month, at a price, and the whole plan should be to leave it within a year or two. Used that way it is sensible borrowing. Used as a destination it is expensive.

The difference between the two

They are often spoken about together and they are not the same thing.

• A second mortgage describes the position. It sits behind your existing first mortgage, which stays exactly as it is. You keep your current rate and term on the first — that matters if your first mortgage is at a rate you would hate to lose, or carries a large break penalty.
• A private mortgage describes the lender: an individual, a mortgage investment corporation, or a small fund rather than a bank or credit union. A private mortgage can be in first position or second.

When one is the right answer

• Equity is there but income will not qualify — common for self-employed borrowers between returns, or after a change in work
• Credit needs twelve months to recover after a proposal, a bankruptcy discharge or a run of late payments
• Arrears or a lender's demand letter, where refinancing stops a power of sale
• CRA or property tax arrears that have to be cleared before any bank will lend
• A bridge between buying and selling, or funds needed before a sale closes
• A renovation that has to happen before the property can be financed conventionally or sold well
• A purchase with an unusual property or a tight closing that a bank cannot process in time

In almost all of these the real product is time.

What it costs, stated plainly

Private lending is priced for risk and for a short term, and the costs are not only the rate:

• A higher interest rate than a bank, and usually interest-only payments, so the balance does not reduce
• A lender fee and a broker fee, normally deducted from the advance rather than paid up front
• Legal fees, an appraisal, and in second position often the first lender's consent
• A short term — commonly one year, sometimes six months — then renewal or exit

How much you can borrow is driven by the equity, not the income. Combined across the first and second, lenders generally stop somewhere around 75% to 80% of the property's value in a strong urban market, and lower where a property would be slower to sell.

Every one of those fees is disclosed to you in writing before you commit. In Ontario a brokerage must give you a written disclosure of the cost of borrowing and of the lender's position, and you should read it rather than skim it. If anyone is vague about fees, that is the signal to stop.

The part most people skip: the exit

Before you sign a private mortgage, the answer to "how does this end" should be a sentence with a date in it. For example:

• Two more years of returns make the file bankable at renewal
• Twelve months of clean payments rebuild the credit score
• The renovation finishes and the property refinances conventionally
• The house sells in the spring

If there is no sentence, a private mortgage is not solving the problem — it is postponing it, and charging for the delay. We would rather tell you that than write the deal.

Common questions

Will a second mortgage affect my existing mortgage?

No. Your first mortgage keeps its rate, payment and maturity date. That is the main reason people choose a second over refinancing the whole thing — breaking a first mortgage early can carry a penalty far larger than the cost of a small second.

Do I need good credit?

Credit matters much less than equity and than whether the property would sell. Many private mortgages are written for borrowers whose credit is the reason a bank said no.

Is a private mortgage safe?

It is a registered mortgage like any other, and in Ontario the brokerage arranging it is licensed by FSRA and must disclose the terms to you in writing. The risk is not the instrument — it is borrowing short-term money without a way out of it.

Can I pay it off early?

Usually, though many private mortgages carry a minimum interest period or a prepayment charge. Ask what it is before you sign; on a one-year term it can matter a great deal.

What if I cannot refinance at the end of the term?

Then you renew, usually at a cost, or you sell. This is exactly why the exit is agreed at the beginning, and why we will say no to a file that has no plausible one.

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This page is general information, not legal or financial advice. Rates, fees and lending limits vary by lender, property and market, and change. Every file is different — speak with a licensed mortgage professional, and obtain independent legal advice before signing. Pegasus Mortgage Lending Center Inc., Brokerage, FSRA Licence #11479.