If you have a private or alternative mortgage in Ontario, or you are considering one, you also need a realistic plan for the end of the term.
The Financial Services Regulatory Authority of Ontario (FSRA) treats these mortgages as a temporary option, often for one or two years, until you can qualify for a lower-cost product. That plan is what FSRA calls an exit strategy.
Ontario’s February 2026 legislative review of the Mortgage Brokerages, Lenders and Administrators Act cited FSRA figures that private lenders accounted for 15.8% of Ontario originations in 2024, and that about 20% of borrowers using non-traditional lenders did not discuss an exit strategy with their broker or agent. If that conversation never happened, the gap is a written plan you can actually follow.
What FSRA actually means by an exit strategy
An exit strategy is not a hope that rates will fall, or a promise that the file can be sorted out at renewal. FSRA describes it as a realistic plan to qualify for more affordable financing when the term ends: which type of lender you expect to move to, what has to change first, a matching time frame, and what you will do if that change does not happen.
FSRA warns against an exit that depends on something you cannot reasonably achieve in the term, such as doubling your salary in six months. If the only way out requires a result you cannot control, it is not an exit strategy.
In Ontario, private or alternative mortgages must be arranged through a Level 2 mortgage agent or mortgage broker. Under the Mortgage Brokerages, Lenders and Administrators Act, 2006, a Level 1 mortgage agent may deal with traditional lenders such as banks and credit unions. Before you sign, that licensee must disclose material risks in writing and in plain language.
Why these mortgages are built as short-term products
These mortgages exist because some files do not fit a conventional lender’s criteria: income that is hard to document, a credit event still aging off, a tight closing, arrears, or a property a bank will not lend on yet. FSRA notes that private lenders often lend against property value rather than income, that rates and fees are often higher than a traditional mortgage, and that many of these loans are interest-only. That is a reason not to treat a one- or two-year product as a long-term home loan.
If you are still comparing private mortgage lenders in Ontario, start with the actual mortgage in front of you. What follows is how homeowners work toward a conventional or alternative institutional lender before the private term runs out.
What usually has to change before a bank or credit union will take the file
A private lender may have approved the loan mainly on equity. A conventional bank generally will not. Before a conventional lender will pay out the private mortgage, the application typically has to meet that lender’s income, credit, ratio, and property tests. Those tests vary by lender and by the borrower’s circumstances. None of what follows is a guarantee of approval.
Income they can underwrite. T4 employment is usually straightforward to document. Self-employed or newly stabilized income usually needs a paper trail a conventional lender will accept, such as tax filings and business statements. Exact documents depend on the lender and the file.
Credit that has had time to recover. Late payments, unpaid collections, or a recent consumer proposal remain part of the next application. Making the private-mortgage payments on time is still important, because missed payments can make the next application harder. On-time payments during the private term do not automatically raise a credit score, and they do not erase the events that led to private financing. Credit bureaus and future lenders look at the whole history.
Debt ratios that fit the new payment. Credit cards, vehicle loans, support payments, and the new mortgage payment typically all count toward a conventional lender’s debt-service tests. Whether it is more useful to pay down revolving debt or to reduce the private-mortgage principal depends on the file: the interest rate on each debt, whether the private loan allows prepayment and on what terms, the next lender’s ratio and equity tests, and the exit you are actually working toward. There is no single rule that fits every homeowner.
Equity that still works after costs. Discharge costs, legal fees, and a new appraisal all affect how much equity is left when the next lender looks at the property. Combined loan-to-value on the day the private mortgage funded is not always the number the next lender will use.
The private term is the period in which those pieces can be repaired. It is not a promise that a bank will take the file on a given date.
The stress test at federally regulated lenders
If the exit is a new uninsured mortgage at a federally regulated lender—the large banks OSFI supervises—you should expect the minimum qualifying rate. As of OSFI’s 29 January 2026 page, that test is the greater of the contract rate plus 2%, or 5.25%.
OSFI does not expect that prescribed rate to apply to an uninsured “straight switch” at renewal when a borrower moves from one federally regulated lender to another without increasing the loan amount or the amortization. Leaving a private mortgage for a bank is generally a new origination, not a straight switch, so do not assume the exception covers your exit. This is an OSFI rule for federally regulated lenders. OSFI’s rule does not directly apply to provincially regulated Ontario credit unions; their qualification requirements depend on applicable provincial requirements and their own underwriting policies. Private lenders are not under that same test.
Common ways Ontario homeowners leave a private mortgage
Refinance with a conventional (A) lender or an alternative (B) lender. An A lender is a conventional institutional lender, such as a bank, with the tightest income, credit, and ratio tests. A B lender is an alternative institutional lender: typically more expensive than a bank, with more flexible qualification than conventional A lending. Some homeowners may move to a B lender before eventually qualifying with a bank. That can still be an exit from private financing. A refinance that pays out the private charge is the mechanical step. Whether A or B is available depends on the borrower, the property, and the lender.
Combine or pay out with a new first mortgage. If the private loan is a second mortgage sitting behind a first, one institutional exit is a new first mortgage large enough to retire both. If the existing first has a penalty, that cost belongs in the math. Not every file will support a new first of that size.
Sale of the property. This is a valid exit. If the private mortgage bought time to list, finish a renovation, or settle an estate or separation, sale proceeds can pay the lender. Name the sale in the plan, with a timeline that fits the term.
Renewal with the same private lender. Renewal is not automatic. It is a new decision, often at a new rate, with new fees, and sometimes a new appraisal. FSRA tells borrowers to ask whether a renewal will even be offered if they still cannot qualify for a traditional mortgage. Treat a renewal as another short-term product that still needs an exit. If a conventional mortgage is also coming due at the same time, map the two dates.
Start this work several months before maturity. Waiting until the last weeks of the term leaves less room if the first exit does not work.
Interest-only payments and a balance that may not shrink
FSRA notes that in many cases you are paying only the interest. You are paying for the use of the money, not reducing the amount you owe. Twelve or twenty-four months later, the principal can still be the same number that funded. If the property has not risen in value, and if fees were added to the loan, loan-to-value can be no better—or worse—than when you started. If the private lender allows principal payments, ask in writing whether they are permitted, whether a penalty applies, and how they are applied.
The work of the term is therefore not only making the payment. It is also assembling the income evidence, credit history, and equity position the next lender will actually review.
Questions to ask a licensed broker
These questions, adapted from FSRA in our own words, are aimed at the exit.
- Why private instead of traditional, and what has to change before a bank or credit union is realistic?
- What is the written exit strategy, and what happens if it does not work in 12 or 24 months?
- How much of each payment is interest, and will the principal decline during the term?
- If I still cannot qualify at maturity, will this lender renew, and at what cost?
- What fees apply now, during the term, at discharge, and at renewal—and will any be added to the loan?
- How much time do I have to review the commitment with my own lawyer?
- What happens if a payment is late, including how quickly power of sale can begin?
- Are you a Level 2 mortgage agent or a mortgage broker, and is the brokerage licensed with FSRA?
Do not sign until you can answer those plainly.
A labelled hypothetical: combined loan-to-value
The figures below are a hypothetical example to show the arithmetic. They are not an offer, a quote, or a statement of what any lender will approve.
Imagine an Ontario home worth $800,000, with a first mortgage of $400,000 and a private second mortgage of $80,000. Combined debt is $480,000. Combined loan-to-value is $480,000 ÷ $800,000 = 60%.
On paper, 60% combined LTV is a relatively strong equity position. Equity is only one part of the next lender’s decision. The same homeowner still has to document income, fit debt ratios—including, at a federally regulated bank, the qualifying-rate test above—and present credit the new lender will accept. Do not treat 60% as a pass.
What to do next
Pull the commitment and the interest schedule. Write down the maturity date, whether payments are interest-only, and every fee due at discharge. Then write the exit you actually believe in: refinance to an A or B lender, combine into a new first, sell, or a time-limited private renewal while a specific item on the file is repaired.
Want to discuss how to exit a private mortgage? Call Victor at 416-895-6074 or email victor@bestrefinance.ca.