1.1 | Defining Private Lending and Mortgages
Private lending in Canada refers to mortgage financing provided by individuals, groups or non-bank entities rather than traditional deposit-taking institutions like banks, trust companies or credit unions.
These private capital sources can include:
- Individual investors seeking alternative assets
- High-net-worth individuals who lend their own funds
- Mortgage Investment Corporations (MICs), which are publicly-traded or privately held corporations that invest in mortgages
- Syndicates of investors or private funds
- Family offices managing wealth for high-net-worth families
Unlike federally regulated institutions, private lenders operate outside of the strict underwriting guidelines and capital adequacy frameworks that govern Canadian banks. This relative regulatory freedom allows private lenders to assess risk and structure loans based on their own criteria, offering flexibility that is not available in the institutional market.
This unique autonomy enables private lenders to service borrowers and properties that fall outside the conventional lending parameters. For example, a private lender may provide financing for:
- A self-employed borrower with limited or non-traditional income documentation.
- A property that is a partially renovated multiplex or has unique title or zoning issues.
- A borrower who needs funds quickly to pay out property tax arrears or resolve a legal matter.
Private mortgages are a crucial tool in time-sensitive, unconventional or transitional financial scenarios. These situations include:
- Urgent Debt Repayment: A borrower needs to quickly pay off a high-interest debt or settle arrears to prevent a public auction or legal action.
- Unique Property Issues: The real estate has zoning, title or occupancy challenges that make it ineligible for a bank mortgage.
- Construction and Development: Financing is needed to complete a project where institutional lenders are unwilling to lend on incomplete collateral.
- Expedited Closings: A purchase requires a faster closing than a bank can accommodate.
- Credit Challenges: Borrowers are in active insolvency, recovering from bankruptcy or have poor credit scores.
While private loans carry higher interest rates and fees, they are generally structured as short-term bridge financing, typically lasting 6 to 18 months. The primary objective is to solve an immediate financial challenge, stabilize the situation, and then facilitate a transition for the borrower to a lower-cost institutional mortgage once the underlying issue has been resolved.
Case Study: A self-employed carpenter needs $75,000 to pay off CRA tax arrears and stop a tax lien on his home. The carpenter has excellent credit, but his income is challenging for a bank to verify. A private lender provides a six-month loan at 12% interest, which allows the borrower to clear the arrears and gives him time to hire an accountant to prepare the necessary financial statements to qualify for a new bank mortgage.