A private mortgage can be exactly the right tool, or an expensive mistake. The difference usually comes down to two things: why you need the money, and how you’ll pay it back. Here’s an honest look at who private mortgages help, and who should look elsewhere.

Private mortgages often make sense if you are…

Rebuilding your credit

Missed payments, collections or a past bankruptcy can keep you out of a bank for a while. If you have equity in your home, a private lender may still approve you. The goal is to use that time to rebuild your credit, then move to a cheaper lender.

In or just out of a consumer proposal

Banks and many alternative lenders want a proposal to be completed, and sometimes some time to pass after that. A private lender can sometimes help while you’re still in the proposal, including paying it out early so you can start rebuilding.

Self-employed

If your tax returns show less income than you really earn, which is common when you write off business expenses, a bank may not approve the amount you need. A private lender looks more at your equity and your business’s real cash flow.

Behind on payments or property taxes

If you’ve fallen behind on your mortgage or your property taxes, a private mortgage can pay off the arrears and give you time to get stable, as long as there’s enough equity and a realistic plan.

Up against a deadline

Buying before your current home sells, closing on a purchase when financing fell through, or paying a debt with a hard due date: private lenders can often move much faster than banks.

Borrowing on a property banks don’t like

Some acreages, rural properties, homes that need significant work, or unusual properties can be hard to finance with a bank. Private lenders are often more flexible about property type.

Private mortgages are usually the wrong choice if…

  • You have no clear way out. If there’s no realistic path to refinancing or selling within the term, you risk renewing again and again, paying fees each time.
  • A bank or alternative lender would approve you. Always check the cheaper options first.
  • The payments only work if everything goes perfectly. If one surprise would put you behind, the loan may make things worse.
  • The costs would use up most of your equity. Fees and interest come out of your equity. If there’s little left over, the risk is high.
  • You’re borrowing to cover ongoing spending. A private mortgage can fix a one-time problem, but it can’t fix a budget that doesn’t balance.

Questions to ask yourself before applying

  1. What exactly will this money do for me?
  2. How will I pay it off or refinance, and when?
  3. What will the total cost be, including fees, over the full term?
  4. What happens if my plan takes longer than expected?
  5. Have I checked whether a bank or alternative lender could help instead?

If you can answer these clearly, you’re in a good position to use a private mortgage well.

Getting an honest opinion

A good mortgage broker will tell you when a private mortgage isn’t the right move, even if it means not doing the deal. If you’re not sure where you stand, it’s worth a conversation before you apply anywhere.

This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.