How Does Private Mortgage Investing Work?

Private mortgage investing sits in the gap between what banks will lend and what borrowers need. Investors who have been told that a mortgage investment corporation “lends privately”, or who have been offered a share in a private mortgage, usually want to know what actually happens to their money: who the borrower is, who decides to lend, what protects the loan, how the interest reaches them, and what happens when a loan goes wrong.

This guide follows a private mortgage through that cycle, names the people involved at each stage, and sets out the routes individuals use to invest. Technical terms are defined in a clause where they first appear and in the mortgage investment glossary.

How does private mortgage investing work in Canada?

Private mortgage investing works as a cycle that repeats for every loan: a borrower applies, the loan is underwritten and registered on title, interest is collected for the term, and the loan is repaid, renewed or enforced. The investor’s money sits in the loan for the whole cycle.

1. Application. A borrower, usually through a licensed mortgage broker, asks a private lender for a loan and explains its purpose.
2. Underwriting. The lender assesses the property, the borrower’s ability to carry the loan, and the exit (how the loan will be repaid at maturity).
3. Commitment. The lender issues a mortgage commitment, the written offer setting out the amount, rate, term, fees and conditions.
4. Legal work and registration. Lawyers search title, confirm what is already registered, register the mortgage and advance the funds through a trust account.
5. Administration. A mortgage administrator collects payments, holds them in trust, pays investors, and tracks property taxes, insurance and the maturity date.
6. Maturity. The borrower repays from a refinancing, a sale or other funds, or the lender agrees to renew.
7. Default, if it happens. The lender enforces its security under the law of the province where the property sits.

Who borrows privately, and why does private lending exist?

Private lending in Canada exists because banks lend within standardised criteria for income, credit and property, and some borrowers fall outside them or need money faster than a bank can approve it. Those borrowers pay a higher rate, and that rate is what private mortgage investments earn.

Common situations include self-employed income that is hard to document, a weak credit history, a purchase that must close before an existing home sells, a renovation that will support a later bank refinancing, or a property a bank will not lend on. None of these is a reason to decline a loan, and none is a reason to approve one; each is a question the underwriting has to answer.

Data on the scale of private lending is published rather than estimated here: FSRA publishes private-lending reports covering Ontario, and Canada Mortgage and Housing Corporation’s Residential Mortgage Industry Report covers the national mortgage market. Both are the places to look for current figures.

Who are the parties in a private mortgage?

A private mortgage involves at least five parties besides the investor, and each produces a document the investor, or the MIC acting for its shareholders, can check. The table lists them in the order they appear.

How is a private mortgage underwritten?

Private mortgage underwriting answers three questions: is the property worth enough and saleable, can the borrower carry the loan, and how will it be repaid at maturity. A loan that fails any one of them is weaker than its interest rate suggests.

• The asset. An independent appraisal sets the value, and the loan-to-value ratio (the loan, plus any loans ranking ahead of it, divided by that value) sets the size of the cushion if the property has to be sold.
• The borrower. Income, other debts, credit history and the reason for the loan show whether the payments are affordable for the full term.
• The exit. Every loan needs a named source of repayment, such as a bank refinancing or a sale, and a fallback if that source fails.

Lendmax Capital MIC describes its own underwriting in these three layers, combined with terms of 3 to 12 months, staggered maturities and concentration limits by region, position and borrower. Other lenders use different frameworks; their offering memorandums describe them.

How are private mortgage investments secured?

Each private mortgage is secured by a mortgage registered on the property’s title, which gives the lender a claim on the property and a ranking against other claims. In Ontario the document is registered electronically as a Charge/Mortgage of Land; in British Columbia and Alberta it is registered in the provincial land title system; in Québec it is a hypothec published in the land register.

The ranking, called position, matters most when a property is sold after default. A first mortgage is paid from the sale proceeds before a second, and a second before a third, after the costs of the sale. The trade-off between position and yield is set out in first and second mortgage investments compared, and the full security package, including title searches, title insurance and property insurance, is covered in how mortgage investments are secured. Security is a claim on property, not a promise of repayment: if the property sells for less than what is owed, principal can be lost.

How are investors in private mortgages paid?

Most private mortgages are interest-only: the borrower pays interest monthly and repays the principal in one sum at maturity. Payments go to the mortgage administrator, which deposits them in trust and pays investors in a direct or fractional mortgage their share; in a MIC, the interest becomes income of the corporation and reaches shareholders as distributions on the schedule its offering memorandum sets. The mechanics, including timing and statements, are in how interest is paid to mortgage investors.

Worked example (illustrative)

A self-employed borrower in Kitchener, Ontario, wants to refinance a semi-detached house to consolidate debts; a bank declined because two years of business income are not yet documented. The figures are round and illustrative, not typical rates.

1. Appraised value: $750,000. Private first mortgage: $450,000, so loan-to-value is $450,000 ÷ $750,000 = 60%.
2. Term: 12 months, interest-only, at an assumed 8.5%. Annual interest: $450,000 × 8.5% = $38,250, or $3,187.50 a month.
3. Lender fee: an assumed 2%, paid by the borrower at funding: $450,000 × 2% = $9,000. The broker’s fee, also paid by the borrower, goes to the broker, not the investor.
4. Administration: an assumed 0.5% a year, paid by the investor: $450,000 × 0.5% = $2,250.
5. Pre-tax income to a direct investor: $38,250 + $9,000 − $2,250 = $45,000, which is $45,000 ÷ $450,000 = 10% of the amount lent.
6. Tax: at an assumed 45% marginal rate, $45,000 × 45% = $20,250, leaving $24,750, or 5.5% of the amount lent.
7. Exit: in month 12 the borrower refinances with a bank, repays the $450,000, and the lawyer registers a discharge (the document removing the mortgage from title).

Had the refinancing failed, the loan would have needed renewing on new terms or enforcing, and the income in steps 2 to 6 would have stopped while costs mounted.

What happens at maturity, or if a borrower defaults?

At maturity a private mortgage is repaid, renewed for a further term (usually on new terms, sometimes with a renewal fee), or left unpaid, which is a default. Default also covers missed payments, unpaid property taxes or lapsed insurance during the term.

When a borrower defaults, the administrator first pursues the arrears. If that fails, the lender enforces its security, and the process depends on the province. Power of sale, a process in which the lender sells the property itself after statutory notice, applies in Ontario under the Mortgages Act, as well as in New Brunswick, Newfoundland and Labrador and PEI. British Columbia, Alberta, Saskatchewan and Nova Scotia use court processes; in British Columbia, judicial foreclosure involves an order nisi and a redemption period before a court-ordered sale. Québec uses hypothecary recourses, such as taking in payment or sale by judicial authority. Manitoba uses an administrative process through the Land Titles Office that can lead to an order for sale. Every route takes months, adds legal and selling costs, and stops interest from being paid while it runs. What happens when a borrower defaults covers the sequence in detail.

How to invest in private mortgages

Individuals invest in private mortgages in one of three ways, and each is a different legal holding.

• Directly, by funding a whole mortgage registered in the investor’s name, with the investor’s own lawyer and an administrator. All of the money depends on one borrower and one property.
• Through a fractional or syndicated interest, a share of one specific mortgage held with other investors. Since 1 March 2021 (1 July 2021 in Ontario and Québec), syndicated mortgages can no longer rely on the private issuer or “mortgages” prospectus exemptions.
• Through a pooled vehicle, most often shares of a mortgage investment corporation or units of a mortgage fund, spreading the money across many loans.

MIC shares and syndicated interests are securities, usually sold under National Instrument 45-106 through a registered exempt market dealer, which must collect know-your-client information and assess suitability. Under the offering memorandum exemption, individuals in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan face limits: up to $10,000 in 12 months for investors who are not eligible investors, $30,000 for eligible investors, and $100,000 for eligible investors who receive suitability advice from a portfolio manager, investment dealer or exempt market dealer; accredited investors have no limit. Other provinces differ. These thresholds are summarised and current as of October 2026; confirm current definitions with a registered dealer. The CSA National Registration Search shows whether a dealer is registered. The full process is set out in how to invest in mortgages, step by step.

What private mortgage investing offers, and what it risks

The appeal and the risk of private mortgage investing come from the same source: lending to borrowers banks will not serve. The table sets each feature against its cost.

Private mortgage investments are not guaranteed. Returns are targets, not promises, and principal can be lost. They are not deposits and carry no CDIC or provincial deposit insurance, and none has a public market for selling early.

Common mistakes in private mortgage investing

These mistakes are about process rather than bad luck, and each can be checked before money moves.

• Judging a loan by its rate. A high rate is the price of risk, not evidence of quality.
• Accepting a value without an independent appraisal. A value supplied by the borrower or broker is not a basis for loan-to-value.
• Ignoring the exit. A loan with no realistic repayment source tends to become a renewal or an enforcement.
• Treating the money as available on demand. Direct loans return money at maturity at the earliest; pooled vehicles impose notice periods and can suspend redemptions.
• Not checking registration. Dealers, brokers and administrators can be checked on regulators’ public registers before any money moves.

What this means for a mortgage investor

Private mortgage investing is a repeating cycle of application, underwriting, registration, administration and repayment, with enforcement under provincial law when a loan fails. The investor is paid for lending where banks will not, which is also why the risk is real and principal can be lost. Comparing any private mortgage investment comes down to seven axes: the borrower, the property, the loan-to-value, the security position, the term, the jurisdiction and the investment structure. This is general education, not investment, tax or legal advice.