… Why It’s Not Always a Straight Shot to Cheaper Money
You’ve probably heard the mantra: “Get out of your private mortgage as soon as you can—move to something cheaper!” And it’s true—most mortgage professionals (myself included) spend our days helping clients transition from private to alternative to prime lending. It’s what we call the mortgage ladder. But here’s the kicker: paying out a private mortgage isn’t always possible or even smart, and rushing into it can cost you more than you save.
So let’s unpack this together.
Topics I’ll Cover
Why Mortgage Agents Want to Move You from Private to Alt to Prime
Why Paying Out a Private Mortgage Isn’t Always Possible
How Realtors and Clients Can Use This Information
What is a Private Mortgage?
A private mortgage is a home loan provided not by a bank or credit union, but by private individuals or companies—often called private lenders. These can include:
- Individual investors
- Mortgage Investment Corporations (MICs)
- Small lending firms specializing in short-term, higher-risk loans
They’re sometimes called “equity-based mortgages” because the lender is often more concerned about the property’s value and available equity than the borrower’s credit score or income situation.
Why People Get a Private Mortgage
Credit Issues: Borrowers with low credit scores, recent bankruptcies, or mortgage arrears may not qualify with banks.
Unique Properties: Rural or non-standard properties that banks won’t finance.
Income Challenges: Self-employed or gig workers who can’t verify income traditionally.
Time-Sensitive Needs: Private mortgages can close fast—sometimes in just a few days—making them useful for quick purchases or emergency payouts.
Construction or Renovation: Especially when a property is under major renovation or not livable
How Private Mortgages Work
- Short-Term: Usually 6–24 months (most commonly 12 months).
- Higher Rates & Fees: Interest rates are often in the 8%–12% range (or more), plus lender and broker fees.
- Interest-Only Payments: Many private mortgages only require interest payments during the term, with the principal paid at the end when the loan is refinanced or the property is sold.
- Exit Strategy Required: Borrowers are expected to move to an alternative lender or prime lender once they qualify.
In Ontario, you need a special mortgage license to be able to do private mortgages (Mortgage Agent Level 2). As a mortgage agent, I always try prime lending or alternative lending before turning to private lending. However, sometimes in certain circumstances, a private mortgage makes the most sense or, it may be the only form lending available to a client in a given set of circumstances.
Why Mortgage Agents Want to Move You from Private to Alt to Prime
Mortgage agents, like me, are in the business of getting you the best possible deal for your situation. Private mortgages are like expensive band-aids: they solve short-term problems—credit hiccups, self-employed income issues, or fast-closing purchase needs—but they’re not designed to be long-term.
The ultimate goal?
- Move you to an alternative lender (think Home Trust, Equitable) as soon as you’re stable enough.
- Then, move you to a prime lender (like a bank, monoline, or credit union for example) once your income, credit, and property are fully in line.
Why? Because each step down the ladder means lower rates and fewer fees, and for most homeowners, that’s real money back in their pockets.
But one of the advantages of a private mortgage as opposed to an Alt or prime mortgage is private mortgage lending is ‘document light’, private mortgage lenders do not need all the documentation that Alt lenders and especially prime lenders demand.
Why Paying Out a Private Mortgage Isn’t Always Possible
Here’s the part people don’t always like to hear: private mortgages often lock you in for the full term’s interest.
Example: You take out a $300,000 private mortgage at 10% interest for 12 months. That’s $30,000 in interest for the year. Even if you pay it off in month four, the lender might still require all $30,000. Ouch, right?
Plus, you’re paying legal fees, appraisal costs, lender fees, and discharge fees just to move. And if your property is under construction or your income hasn’t stabilized yet, alternative lenders may not even approve the switch. Sometimes, you’re better off finishing the private term and then moving.
Typical Working in Commitments
You’ll often see phrases like:
- “The mortgage is closed for the term and if discharged prior to maturity, all interest to maturity will be due and payable.”
- Or: “Full interest holdback for the term to be collected upon early payout.”
A Story from the Field
Jason had a prime mortgage on his home but needed funds to add a basement apartment. His bank wouldn’t lend more because the property was under construction. He grabbed a quick $150,000 private second mortgage. Six months in, the carrying cost felt heavy, and Jason wanted out.
On paper, an alternative lender could have paid out both mortgages and put him in one loan. But Jason’s private lender required the entire year’s interest up front to break early, plus $2,500 in legal discharge fees. Even after refinancing, Jason would have ended up paying thousands more than if he just toughed it out, finished the basement, and refinanced at the end of the private term.
Jason stayed the course, and a year later, we refinanced him into a competitive alternative lender product and—18 months later—moved him back to a prime lender. Now, he’s cash flowing on that rental unit and back in low-rate territory.
How Realtors and Clients Can Use This Information
- For Realtors:
- Be aware when clients mention private mortgages. If they’re planning renos, don’t promise quick refinance exits unless you know the penalty structure.
- Team up with a licensed mortgage agent like myself early in the process so clients have a roadmap to get back to cheaper lending.
- For Clients:
- Don’t assume you can just jump out of a private mortgage whenever you want. Read the fine print or, better yet, call me to review it with you.
- Plan your project and financing timeline together—construction, credit rebuilding, and income documentation all affect when it makes sense to refinance.
Allen’s Final Thoughts
Paying out a private mortgage can feel like the obvious move. After all, who wants to pay double-digit interest? But private lenders play by different rules, and sometimes, rushing out early costs more than staying put until the term ends. The smart play is to look at the whole picture: your credit, income, property value, project stage, and penalty structure.
As your mortgage agent, my job is to lay out all your options, do the math, and help you climb that mortgage ladder at the right time, not just the fastest time.
If you’re a homeowner or a realtor wondering about private mortgages, penalties, or how to plan the perfect exit strategy, let’s talk. I’m here to give you clear answers, realistic timelines, and support—whether that means negotiating with your private lender, finding the right alternative lender, or structuring your path back to prime.
Because at the end of the day, this isn’t just about mortgages—it’s about peace of mind and building financial stability.
