When a self-employed Ontario homeowner is turned down by the bank on a refinance, the next conversation is often about private mortgage lenders. This article is about that product: a private first or second mortgage arranged against the equity in a home you already own, usually as short-term financing rather than a five-year bank replacement.
Private lenders typically weigh property value and loan-to-value more heavily than the CRA-verified income package a federally regulated bank is expected to underwrite. That can open a door after a bank decline. It can also be an expensive, time-limited charge with fees, interest-only payments, and a term that ends before a bank or B-lender will take the file back. None of this is a promise that a private lender will approve you. It is an explanation of when private mortgages are considered, how they are structured, and why an exit plan belongs on the table before you sign.
When private mortgage lenders may be considered
A decline from one bank is not a decline from the entire market. Another federally regulated lender still has to satisfy OSFI Guideline B-20. Alternative (B) lenders sit between a bank and a private charge: income, credit, and property still matter, usually at a higher rate than a bank. For some self-employed files that is the whole solution.
Private mortgages may come into view when traditional or B-lender options are unavailable or do not reasonably fit the borrower’s circumstances, or when the timeline will not wait for another year of assessed income. Typical situations include a self-employed refinance where verified income cannot carry the new payment at the qualifying rate, tax arrears that stall a traditional file, credit a bank will not book, or a property outside what a bank or B-lender will take. The Financial Services Regulatory Authority of Ontario (FSRA) treats alternative and private mortgages as a temporary option, often for one or two years, until you can qualify for a lower-cost product.
If you are comparing private mortgage lenders who work with Ontario homeowners, start with why a traditional lender said no, then ask whether a private first, a private second, or a short bridge matches that reason. Jumping to private because last month’s deposits looked healthier than the Notice of Assessment is how people buy an expensive term they did not need.
Equity, loan-to-value, and private first or second charges
FSRA notes that private lenders will often give you a mortgage based on the value of your property instead of your income. Equity is the gap between appraised value and what is already registered against the home. Loan-to-value is the lending amount as a share of that value. A private first sits in first position. A private second sits behind an existing first, so combined loan-to-value matters more than the size of the second alone.
Banks also care about loan-to-value, but B-20 says the borrower’s willingness and capacity to service the debt should be the primary basis of a federally regulated lender’s credit decision. Private lenders may place greater emphasis on the property, available equity and loan-to-value than a conventional bank. Income, credit and other borrower circumstances may still be considered, and requirements vary by private lender. That is why thin assessed income plus substantial equity can lead to a private discussion after a bank decline, and why little equity or a property a private lender will not book can fail even when the business is busy. Private lenders set their own limits. An appraisal, a lawyer’s title review, and a full list of existing charges are the starting documents.
A private first is sometimes used to replace a bank mortgage that will not refinance, or to pay out a first that is in trouble. A private second mortgage may be used when an existing first mortgage remains in place and the homeowner needs additional financing against available equity. A second stacks cost on top of the first payment. Many private mortgages are structured with interest-only payments, so depending on the terms, the principal balance may not decline during the mortgage term. Existing first-mortgage terms may restrict additional financing or require lender consent. The mortgage terms and title should be reviewed by the borrower’s lawyer before adding a second charge.
The income package banks still ask for
Guideline B-20 tells federally regulated lenders to verify income with rigour. For self-employed borrowers, it says lenders should obtain proof of income, and the examples it names are a Notice of Assessment and a T1 General, plus relevant business documentation. That is not a rule that banks may use only the CRA-assessed number and nothing else. The T1, the NOA, and the business package travel together. A sole proprietor is often asked for the T1, the T2125, and matching notices of assessment. An incorporated owner is often asked for personal T1s and NOAs plus corporate returns and financial statements. Business-account screenshots and invoices can support that story. They do not replace that package at a federally regulated lender.
A bank refinance is a new underwrite. OSFI’s minimum qualifying rate for uninsured mortgages is the greater of the contract rate plus 2%, or 5.25%. The straight-switch exemption at renewal does not rescue a refinance that increases the loan amount or remaining amortization. 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. Write-offs that shrink tax also shrink verified income. If income cannot be verified to B-20’s standard, OSFI expects federally regulated lenders to treat that as a higher-risk attribute and to cap those non-conforming mortgages at a loan-to-value ratio of 65% or less. That fork is usually what brings private lenders into the conversation.
Costs, interest-only payments, short terms, and exit strategy
FSRA is direct: it can be easier to get an alternative or private mortgage, but you may face higher interest rates and fees along with additional conditions or restrictions. Ask in writing for the interest rate, whether the mortgage is open or closed, how interest is paid, lender and brokerage fees, appraisal, legal, and discharge or renewal costs. Ask whether fees are deducted from the advance, added to the principal, or due in cash at closing.
In many cases you pay interest only, which means you are paying to borrow the money, not reducing the amount you owe. That can lower the monthly carrying cost. It does not make the balance at maturity smaller. Private lenders can also charge for late payments, lapsed insurance, or property upkeep if they take steps under the charge. FSRA warns consumers to watch whether power of sale can start quickly after a missed payment. Do not sign until your own lawyer has reviewed the commitment. Any illustration you are shown is hypothetical until the numbers are in a written commitment.
A private term is often one or two years. FSRA expects a realistic exit strategy, not a plan to double your income in six months. Common exits include a later bank or credit-union application once the income package is in order, a move to a B-lender, a sale, or reducing the private balance so a conventional first can take it out. Ask whether this lender will offer a renewal if you still cannot qualify, what that would cost, and what happens if you cannot pay the balance on maturity. A related file is a bank that will not renew an Ontario mortgage, which can also lead to a short private term rather than a five-year replacement.
Risks, suitability, and a labelled hypothetical
Private mortgages are a different risk: higher cost, a short term, possible interest-only payments, fees that reduce the net advance, and a charge against your home if you cannot pay or refinance at maturity. FSRA requires mortgage professionals to assess whether a recommended mortgage is suitable for the borrower and to consider why lower-cost financing options are not appropriate. If a realistic bank or B-lender path still exists once the paper is assembled, private is usually the wrong first call.
The example below is hypothetical. It is not an offer, a quote, or a statement of what any lender will approve. Imagine an Ontario homeowner who left a T4 job three years ago and now runs an incorporated trade. The company covers the household and the current mortgage, but the last two personal notices of assessment show much lower net income. The homeowner wants to refinance because a HELOC and two cards have piled up. A bank refinance needs verified income that can carry the new payment at the qualifying rate. If that income cannot support it, the file fails even though the business is busy. A B-lender might use a different income treatment. A short private first or second may be considered when traditional or B-lender options are unavailable or do not reasonably fit the borrower’s circumstances. The private term then needs a real plan: file returns a traditional lender can use, clear CRA if anything is outstanding, and be off the private charge before the term is up.
Licensing and next steps
In Ontario, private or alternative mortgages must be arranged through a Level 2 mortgage agent or mortgage broker. A Level 1 mortgage agent may deal with traditional lenders such as banks and credit unions. Under the Mortgage Brokerages, Lenders and Administrators Act, 2006, material risks must be disclosed in writing and in plain language before you sign. Confirm the person is licensed with FSRA. Give the commitment to your own lawyer.
If you are still testing a bank path, download the notices of assessment and T1s for you and any co-borrower, plus matching business documents, a mortgage statement, property-tax bill, unsecured debts, and any CRA balance in writing. Ask the bank which documents and which income number it used. If the file is heading private, ask why this product, what the payment is made of, whether principal declines, what happens if you are late, whether renewal is available, what the costs are now and at the end, and what the written exit is if the first plan fails.
Want to discuss private mortgage options after a bank decline? Call Victor at 416-895-6074 or email victor@bestrefinance.ca.