Private mortgages generally cost more than traditional mortgages from banks and credit unions. This is because private lenders assume greater risk by offering loans to individuals who might not qualify for conventional financing due to factors such as poor credit, unconventional income sources, or unique property situations.

Understanding Private Mortgage Costs

Here’s a breakdown of the typical expenses associated with a private mortgage in Canada:

• Interest Rates: Private mortgage interest rates are considerably higher than those offered by traditional lenders. While rates can vary widely, they typically range from 6% to 18%, with an average of approximately 10.99%. For first mortgages, rates usually range from 7.99% to 9.99%. Second mortgages, on the other hand, can be higher, often ranging from 9.99% to 11.99%, and occasionally as high as 16.99%. Your specific rate will depend on your credit history, down payment, loan-to-value (LTV) ratio, property type, and location.
• Lender Fees: Private lenders typically charge a "lender fee," also referred to as a commitment, placement, or administration fee. These fees are typically a percentage of the loan amount, commonly ranging from 1% to 4%, but can sometimes go up to 10-12%, with an average around 4-6%. These fees compensate the private lender for the increased risk and administrative effort involved.
• Brokerage Fees: If you use a mortgage broker to connect with a private lender, they will likely charge a brokerage fee. This fee often mirrors the lender's fee; for instance, if the lender charges 2%, the broker might also charge 2%.
• Legal Fees: You'll incur legal expenses for the services required to draft and finalize your mortgage. This generally ranges from $1,500 to $3,500 or more, as you typically cover the costs for both your lawyer and the lender's lawyer. Additional fees may apply for debt payouts, lien removals, or garnishments.
• Appraisal Fees: Private lenders almost always require a property appraisal to determine its market value. This fee typically ranges from $300 to $600, but can be higher for properties valued over $1 million.
• Other Potential Fees:
  • Title Search Fees: Around $250 to $500 to confirm a clear property title.
  • Administrative Fees: Typically, $150 to $650 for processing your application.
  • Renewal Fees: If you renew your private mortgage, lenders may charge a renewal fee, which can vary significantly.
  • Collection and Management Costs: If you miss payments.

Many of these fees are often added to your mortgage amount, especially for second mortgages, so you might not need to pay them upfront. However, if you have insufficient equity or it's a purchase transaction, you may need to pay these fees separately.

Key Differences from Bank Mortgages

• Higher Interest Rates: This is the most significant distinction.
• Increased Fees: Private mortgages typically involve more numerous and often larger fees.
• Shorter Terms: Private mortgages are usually short-term solutions, often for 6 months to 3 years, unlike the longer terms (up to 25-30 years) available with banks.
• Interest-Only Payments: Many private mortgages are interest-only, meaning your monthly payments cover only the interest, and the principal amount remains unchanged. You still owe the original loan amount at the end of the term.
• Property-Based Qualification: Private lenders often focus more on the property's equity and marketability than on your credit score or traditional income verification.

Example Cost Calculation

For a $200,000 private second mortgage with a 10% interest rate and a 2% lender fee for a one-year term:

• Interest Cost: $200,000 x 0.10 = $20,000
• Lender Fee: $200,000 x 0.02 = $4,000
• Monthly Interest-Only Payment: $20,000 / 12 = $1,667
• Total Cost (excluding other fees, such as legal/appraisal): $20,000 (interest) + $4,000 (lender fee) = $24,000 for the year.

It’s essential to fully understand all associated costs and have a clear "exit strategy"—like improving your financial situation to qualify for a traditional mortgage—when considering a private mortgage. They are generally meant as short-term financing solutions. Always consult with a licensed mortgage professional and a real estate lawyer to thoroughly understand the terms and conditions.