How Private Mortgages Work for Bad Credit Borrowers in Toronto

For many Canadians, the dream of homeownership or accessing home equity can feel locked behind a three-digit number: the credit score. Traditional banks often respond with an immediate “no” if you have missed payments, a consumer proposal, or a past bankruptcy—regardless of your current income or the property’s value.

In Toronto’s fast-moving real estate market, waiting years to rebuild credit can mean losing out on homes or financial opportunities. This is where private mortgages come in. By focusing on the property itself rather than past credit challenges, private lending provides a bridge to homeownership and financial stability for those who have been turned away by traditional institutions.

The Equity-First Lending Model

The key difference between private and traditional mortgages lies in underwriting philosophy. While banks prioritise credit history and debt ratios, private lenders—ranging from individuals to Mortgage Investment Corporations (MICs)—focus primarily on equity and property value.

• Loan-to-Value (LTV) Ratio: Most private lenders are willing to overlook low credit scores if the home has sufficient equity, often lending up to 75–80% of the property’s appraised value.
• Property as Security: The house itself acts as the primary guarantee, enabling borrowers considered “high risk” by banks to access capital.

This equity-focused model is particularly helpful for self-employed buyers or those with non-traditional income sources.

Why Bad Credit Isn’t a Deal-Breaker

Private lenders operate outside federal stress test requirements, giving them flexibility banks lack. They understand that life events—medical emergencies, divorce, or business setbacks—can impact credit without reflecting long-term financial responsibility.

Because lenders prioritise the asset over the borrower’s past, approvals are often based on the property’s market value and location, making private mortgages a viable solution even when credit scores are low.

The Cost of Accessing Private Capital

It is essential to understand that private mortgages are a premium financial product. Because the lender is assuming the risk that traditional institutions refused, the costs are structured to reflect that exposure.

• Interest Rates: Rates are higher than standard bank rates, often ranging from 8% to 15%, depending on the severity of the credit issues and the LTV.
• Lender and Broker Fees: Borrowers should expect a “lender fee” and a brokerage fee, usually totaling 1% to 3% of the loan amount, which is often deducted from the proceeds.
• Legal and Appraisal Costs: You will be responsible for the cost of a professional appraisal and the legal fees for both your lawyer and the lender’s lawyer.
• Interest-Only Payments: To keep monthly costs manageable, many private mortgages are interest-only, meaning you aren’t paying down the principal balance during the term.

The Necessity of a 12-Month Exit Strategy

A private mortgage is a temporary fix, not a forever loan. In the Toronto market, most private terms last for only 12 to 24 months. The goal for a borrower with bruised credit should be to use this year as a “rehabilitation period.”

• Credit Rebuilding: Use the 12-month term to make every payment on time and settle any outstanding collections or judgements.
• Debt Consolidation: Use a private second mortgage to pay off high-interest credit cards, which immediately improves your credit utilization ratio.
• Income Documentation: Use the time to gather the necessary tax returns and Notices of Assessment (NOAs) to prove income stability to a future lender.
• Refinance Planning: Work with an expert at Toronto Second Mortgage Broker to ensure you are hitting the specific milestones required to transition back to a traditional lender.

Managing the Risks of Private Capital

While private mortgages open doors, they also come with strict conditions. Borrowers must be proactive and disciplined to ensure the “bridge” leads to a successful long-term financial outcome.

• Non-Renewal Risk: There is no guarantee a private lender will renew your mortgage; you must be ready to move the loan at the end of the term.
• Power of Sale: Private lenders can be faster to initiate legal action or a “Power of Sale” if payments are missed compared to large banks.
• Short Terms: Because terms are short, you must start the process of looking for your next mortgage at least three months before the current one expires.

Take Control of Your Financial Future Today

A private mortgage is more than just a loan; it is a strategic second chance. For a borrower with bruised credit, it provides the immediate liquidity needed to secure a home or consolidate high-interest debt while the credit repair process happens in the background. 

Don’t let a credit score stop you from participating in the Toronto real estate market. By treating a private mortgage as a short-term tool rather than a long-term burden, you can stop being a spectator and start building real estate wealth. When used correctly, today’s private mortgage is simply the foundation for tomorrow’s traditional bank approval.