How Private Mortgage Loans Are Structured: What Borrowers Need to Know

If you're struggling to get approved for a traditional mortgage due to a low credit score, inconsistent income, or an unconventional employment history, you're not alone. Many Canadians face similar hurdles. Fortunately, private mortgage loans have emerged as a practical alternative, offering flexible solutions for borrowers who don’t meet the strict criteria of major banks.

In this article, we’ll break down how private mortgage loans work, what their structure looks like, and what borrowers—especially those seeking a bad credit mortgage—should keep in mind. We’ll also touch on why private mortgage lenders in Ontario are becoming increasingly popular for people in complex financial situations.

What Is a Private Mortgage?

A private mortgage is a home loan offered by individuals or private institutions rather than traditional banks or credit unions. These lenders include private investors, mortgage investment corporations (MICs), and companies that specialize in non-traditional financing.

Private mortgages are most commonly used when a borrower doesn’t qualify for a mortgage from a bank—usually due to bad credit, self-employment, low income, or the need for short-term financing.

Why Consider Private Mortgage Lenders in Ontario?

Ontario has one of Canada’s most active real estate markets, especially in urban hubs like Toronto, Ottawa, Mississauga, and Hamilton. With rising home prices and tighter lending rules under the mortgage stress test, more borrowers are turning to private mortgage lenders Ontario to secure financing that meets their unique needs.

These lenders offer more flexibility than banks. They look beyond your credit score and focus instead on the equity you have in the property, the location and condition of the home, and your overall financial picture.

How Are Private Mortgage Loans Structured?

Understanding how private mortgages are structured will help you decide if this type of financing is right for you. While each lender may vary slightly in their process, here are the key components:

1. Loan-to-Value Ratio (LTV)

One of the first things a private lender considers is the Loan-to-Value (LTV) ratio. This is the percentage of your home's value you're looking to borrow.

• Most private mortgage lenders are comfortable with an LTV between 65% and 85%.

• The more equity you have, the better your chances of approval—even with bad credit.

If you're applying for a bad credit mortgage, your LTV becomes a major factor in securing financing.

2. Shorter Terms

Unlike traditional mortgages, which often have terms of 5 years or more, private mortgages are typically short-term—usually ranging from 6 months to 3 years. These loans are often used as a bridge loan or a stopgap until the borrower is able to refinance with a traditional lender.

This structure is ideal if:

• You're fixing your credit

• Waiting for a major source of income

• Planning to sell or renovate the property soon

3. Interest Rates

Because private lenders take on more risk (especially for a bad credit mortgage), the interest rates are higher than those of traditional banks. Expect rates ranging from 7% to 12% or even more, depending on your profile.

The good news? You get access to funds when no one else is willing to lend, which can be crucial for maintaining your financial footing or taking advantage of a real estate opportunity.

4. Interest-Only Payments

Many private mortgage loans are interest-only, which means you only pay the interest during the term, not the principal. While this keeps monthly payments lower, it’s important to have a plan in place for the end of the term—whether that’s refinancing or repaying the full amount.

5. Fees and Closing Costs

Private mortgages often come with additional fees, including:

• Lender fees (typically 1-3% of the loan amount)

• Broker fees (if you’re working through a mortgage broker)

• Legal fees

• Appraisal fees

Make sure to ask for a full breakdown of costs upfront. Reputable private mortgage lenders in Ontario will be transparent about all charges involved.

6. Flexible Qualification Criteria

This is where private lenders shine. They usually won’t require the same documents as a bank and may:

• Accept self-employed income

• Overlook recent bankruptcies or consumer proposals

• Focus on your property’s equity rather than your income or credit score

If you’ve been turned down by multiple banks, a private lender may be your best shot at securing a bad credit mortgage and staying on track financially.

Risks to Consider

While private mortgages offer access and flexibility, they’re not without risks:

• Higher interest rates and fees can be expensive if the loan is held long-term

• Shorter terms mean you’ll need a clear exit strategy (e.g., refinance, sell, or repay)

• Limited regulation in the private lending space means you should always work with a licensed mortgage professional and review contracts carefully

When Is a Private Mortgage the Right Choice?

A private mortgage might be suitable if:

• You’re facing temporary credit challenges

• You need fast funding

• You’re self-employed with inconsistent income

• You’re looking for a short-term solution before refinancing with a traditional lender

• You need a second or third mortgage and traditional banks won’t approve

Final Thoughts

Private mortgage loans can be a lifeline for those who don’t fit the traditional lending mold. Whether you’re trying to recover from financial hardship or just need a short-term solution, private mortgage lenders in Ontario offer flexible options that go beyond your credit score.

If you're struggling to qualify with a bank and need help accessing home equity, especially for a bad credit mortgage, exploring private lending may be your next best step.

Just be sure to do your homework—understand the loan terms, fees, and risks involved. Better yet, consult a licensed mortgage broker who can connect you with reputable lenders and help you create a plan that protects your long-term financial health.