Private Lending in Ontario: What Borrowers and Investors Need to Know
Private mortgages fill gaps that banks won't touch. Here is a plain-English breakdown of how Ontario's private lending market works, who uses it, and what the risks are on both sides of the transaction.
Canada's banking system is among the most conservative in the world. That conservatism protects depositors and maintains financial system stability. It also means that a wide range of legitimate borrowers cannot access bank financing on their preferred terms or timelines.
This is the gap that private lending fills.
What Is Private Lending?
Private lending — also called private mortgages or alternative mortgages — refers to loans secured by real property, originated by lenders outside the regulated banking system. Lenders can be individuals, syndicates, mortgage investment corporations (MICs), or private funds.
In Ontario, the industry is regulated under the Mortgage Brokerages, Lenders and Administrators Act and administered by the Financial Services Regulatory Authority of Ontario (FSRA). Licensed lenders and brokers are subject to meaningful conduct and disclosure requirements.
Who Uses Private Lending?
Borrowers typically turn to private lending for one of three reasons. Speed: private lenders can close in days rather than the 45 to 60 days a bank approval typically requires, which matters for competitive acquisitions. Fit: some borrowers have strong assets but non-traditional income documentation that institutional lenders will not accept. Bridge: developers and investors often need short-term financing to bridge between construction completion and long-term financing, or between acquisition and repositioning.
The common thread is not creditworthiness. Many private borrowers are creditworthy by any reasonable standard. They simply do not fit the standardized box that institutional lenders require.
What Do Private Lenders Earn?
Private mortgages carry higher interest rates than bank financing — typically ranging from 6% to 9% annually in the current rate environment for first mortgages, and higher for second mortgages, depending on loan-to-value ratio, property type, and borrower profile. With the Bank of Canada's overnight rate at 2.25% and conventional mortgage rates in the high 3% to low 4% range, the spread that private lenders charge reflects the additional risk, illiquidity, and underwriting effort involved. Lenders also typically charge upfront fees of 1% to 2% of the loan amount.
From an investor perspective, this creates the opportunity to earn secured, real estate-backed returns that compare favourably to traditional fixed income alternatives.
The Risk Factors
Higher yield comes with higher risk. The primary risks for private lending investors are borrower default, property value decline, and liquidity. Private mortgages are not liquid instruments. If you need your capital returned before the term ends, your options are limited.
Loan-to-value discipline is the primary risk management tool. Lending at 65% LTV on a conservatively appraised property means values would need to decline 35% before the lender faces a principal loss. Well-managed private lending programs maintain strict LTV limits for exactly this reason.
In a rising vacancy environment, lenders on properties with income-dependent valuations should be particularly attentive to in-place rents and occupancy levels at the time of underwriting. A softening rental market can compress net operating income, which in turn affects the appraised value of income-producing properties.
The Bottom Line
Private lending serves a genuine market need and can offer investors attractive risk-adjusted returns when structured carefully. Understanding the mechanics — and the risks — is essential before participating on either side of the transaction.