In our work with borrowers exploring private financing solutions, we always emphasize the many moving parts that come into play when dealing with private lenders.
Just last week, a client sent me a list of private lenders and their advertised rates, asking if it was accurate.
It was a good reminder that there is so much more to private lending than rates alone — and it inspired me to write this article to help borrowers better understand what private lenders are really looking for.
What factors do private mortgage lenders consider?
Private lenders evaluate applications far more broadly than many people expect. Here’s what really matters.
The more equity, the better
This is best illustrated with a simple example: two identical properties in a residential subdivision, both seeking a private second mortgage to pay off high-interest credit card debt. The applicants are identical twins with matching credit scores, similar jobs, and comparable incomes.
The properties are both worth $1 million and each homeowner needs $100,000 in new money
Home (A) has a first mortgage of $300,000 and home (B) has a first mortgage of $650,000.
Clearly, applicant (A) is in a much stronger position, with plenty of equity remaining even after the new mortgage. In contrast, applicant (B) would reach a 75% combined loan-to-value ratio once the second mortgage is funded.
The homeowner with more equity can expect better terms than his twin next door.
Location matters more than you think
One of the first things private lenders assess is location. Most prefer properties situated in or near major urban centres.
Rural properties, no matter how attractive or valuable, often face an uphill battle for financing. We’ve seen private lenders decline deals solely because a property was too remote or the local market too limited.
Zoning and marketability are key concerns
Zoning is another critical factor. Lenders want to ensure the property’s use complies with local regulations and that there are no issues that could affect its marketability or resale value.
A couple of quick examples:
- If a property is mixed-use, such as a retail store on the ground floor with residential units above, it’s considered a commercial mortgage, not residential.
- If there’s a working farm on the property, it changes the nature of the deal entirely.
It’s also a misconception that more expensive properties are easier to finance. In reality, properties with extremely high valuations can be harder to sell, adding an extra layer of perceived risk for lenders.
Loan size restrictions limit your options
Most private lenders cap their loan amounts between $1 million and $1.5 million.
Loans above these limits are considered “jumbo loans,” and the pool of willing lenders shrinks dramatically. Structuring the deal carefully and setting realistic expectations becomes even more critical at these higher loan amounts.
Rates are just a starting point
Advertised private mortgage rates are usually “starting from” rates — not firm offers. The actual rate you receive will depend on several factors, including:
- Loan-to-value ratio (LTV)
- Credit profile
- Additional financial assets
- Income stability
- Property condition
- Exit strategy
Some lenders place a heavier weight on credit scores, while others focus more on the property’s value and the borrower’s plan for repayment.
Not all private lenders are created equal
Ease of doing business matters a great deal. Some lenders with seemingly attractive rates can make the process difficult, unpredictable, and costly. We never recommend these lenders to our clients — even in urgent situations.
Flexibility is also key. Some lenders allow prepaid interest to ease cash flow, offer open mortgage options for early repayment, or waive certain fees under specific conditions. Others are far more rigid. Understanding the lender’s flexibility upfront can make a big difference down the road.
Repayment terms, renewal options, and property condition
Private mortgages often require borrowers to pay three to six months’ interest if they pay off the loan before maturity. However, some lenders offer fully open mortgages with no penalties — an important distinction to confirm before committing.
Renewal terms are another area where borrowers need clarity. Never assume a renewal will be automatic or affordable. Know the costs, the process, and the conditions ahead of time.
And finally, property condition matters a great deal. Properties in poor repair — including neglected or “hoarder” homes — raise immediate red flags for lenders and can derail an otherwise strong application.
Why an exit strategy is non-negotiable
Every private lender will want to see a credible exit strategy. How will the loan be repaid? Is there a realistic plan to refinance or sell the property within a set timeline?
Without a clear plan, borrowers risk getting stuck in cycles of short-term renewals with escalating costs — a situation that can become financially devastating over time.
What costs should borrowers expect with private mortgages?
Unlike traditional mortgages, private mortgages almost always come with lender fees and brokerage fees, typically payable upfront.
These fees can add several thousand dollars to the overall borrowing cost, so they must be factored into your budgeting from the start.
How regulatory compliance affects private mortgages
The private mortgage sector is under heavier scrutiny from regulators like the Financial Services Regulatory Authority of Ontario (FSRA). Brokerages are tightening their approved lender lists to ensure compliance and protect borrowers from predatory practices.
When considering a private mortgage, it’s critical to work with professionals who vet their lenders carefully and adhere to high standards of accountability and client protection.
Additional resources for borrowers
If you are considering a private mortgage, it’s crucial to go in with eyes wide open. Here are some valuable resources to help you dive deeper:
The bottom line
Private mortgages can be an excellent solution when traditional financing isn’t available, offering flexibility that borrowers often need. But they also come with their own set of complexities and risks.
From understanding how location influences lender appetite, to factoring in hidden costs like lender and brokerage fees, to ensuring you have a clear and credible exit strategy — there’s a lot to consider before signing on the dotted line.
And there’s even more to keep in mind. For instance, some private lenders have policies where they will not refinance an existing private mortgage, no matter the circumstances.
Others may refuse to place a second mortgage behind a first private mortgage, limiting your options if you need additional financing.
This is why working with an experienced mortgage professional is so important. You need someone who can guide you through the process, who presents transparent options, and who always puts your best interests first.
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Last modified: May 7, 2025