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The words private and bank describe who the lender is, and they decide what you are tested on, what you pay and what protections come with the loan.
The side-by-side
| Bank or credit union | Private lender | |
|---|---|---|
| Main test | Credit, income and debt, plus equity | Equity first, plus a plan to repay |
| Rules that apply | Federal underwriting guideline for banks, plus provincial rules | Provincial rules, and the lender’s own standards |
| Rate | Lower | Higher |
| Fees | Appraisal, title and legal costs | Those, plus a lender fee and often a broker fee |
| Term | Set by the lender | Often shorter, so a balance can come due sooner |
| Who it reaches | Borrowers who meet its tests | Many borrowers a bank has declined, including some with bruised credit |
The description of a second mortgage, the 80% limit and the cost items come from the Financial Consumer Agency of Canada. The rule about federally regulated institutions comes from OSFI.
Why they differ
A bank is a federally regulated financial institution. OSFI says its guideline on residential mortgage underwriting applies to those institutions, which it lists as banks, foreign bank branches, trust and loan companies, and insurance companies, and that the legal maximum for an uninsured mortgage is 80% of value. A private lender is not on that list, so OSFI’s guideline is not what governs it. It can say yes to a file a bank cannot, and it prices that risk into the rate and the fees. Both kinds of lender are still bound by provincial rules, so ask who is regulating the person you are dealing with.
What each costs
The worked example holds the loan at $40,000 for two years. On assumed rates, the bank loan costs $7,600 and the private loan costs $12,500, a difference of $4,900. The size of the gap depends on real quotes, and it grows with each extra year.
The agency says second mortgage rates are usually higher than on first mortgages because lenders see them as riskier. A private lender sits further along that scale. Ask for the rate, the lender fee, the broker fee, the legal costs and what it charges if you repay early or renew. Add them together before you compare.
What each risks
Both loans are secured on your home, and the agency warns that you may face serious consequences, including foreclosure, if you cannot repay.
The bank’s risk is mostly the review. You may spend time and an appraisal fee, then be declined, and a decline can slow down a problem that needed speed. A private lender’s risk is mostly the end date and the cost. A short term means you need to repay or refinance on a schedule, and the higher payment leaves less margin. Read the renewal terms closely, and be careful with anyone who rushes you to sign.
How the application feels different
With a bank or credit union, expect forms, income documents, a credit check and an appraisal, followed by a decision that depends on those documents. If your file is straightforward, that process is predictable. If your income is irregular, such as self-employment or commission pay, the paperwork can become the obstacle, since the review looks for a clear, documented pattern.
With a private lender, the conversation usually starts with the home. What is it worth, what is owed on it, and what is the plan for repaying? Credit and income still matter, but they are weighed differently, and a recent credit event may not end the discussion. The trade is that the lender prices that flexibility into the loan.
Whichever route you choose, someone should explain the terms before you commit. Ask for the loan terms in writing and take them to a lawyer if anything is unclear. Be wary of any lender or intermediary who cannot show you a licence, who asks for a fee before explaining the costs, or who tells you to sign quickly.
Moving from private to bank later
Many people use a private second mortgage as a stop along the way. The idea is to repay it with a cheaper loan once credit has recovered or income has become easier to document. That plan can work, and it also carries a risk, because the later bank decision is not in your hands. If circumstances change, you may have to renew the private loan, which can carry another fee.
To keep the option open, ask three things at the start. Is there a charge for repaying early, and how much is it? What does a renewal cost if you need one? How far ahead should you start talking to a bank? Then keep your records tidy during the term, pay on time, and reduce other debts, since each of those helps the next lender say yes.
Which situation suits which
A bank or credit union tends to suit someone with steady, documented income, a manageable debt load and enough equity. Try it first, since it is usually cheaper. A private lender tends to suit someone a bank has declined because of self-employed income, a recent credit event or an urgent timeline, who has solid equity and a believable plan to repay.
If you are recovering from a credit event, read what to expect after a consumer proposal. If you are weighing a line of credit instead, see how a HELOC compares.
Questions to ask before you sign
Ask who the lender is and who is arranging the loan, and look up their licence with your provincial regulator. Ask for the total cost in dollars over the full term and the date the balance is due. Ask what happens if you are late, and what happens if you cannot repay on the due date. Ask whether the first mortgage lender needs to be told.
To compare real options with a licensed mortgage professional, you can check your options. It is a request, and you can say no.
A $40,000 interest only second mortgage held for two years, bank against private
Made-up figures. The bank loan is at an assumed 8% with an assumed $1,200 for appraisal, title and legal. The private loan is at an assumed 12% with an assumed 2% lender fee, 1.5% broker fee and $1,500 for appraisal, title and legal. Interest only, so $40,000 is still owed at the end. Real quotes will differ, and a bank may not offer a second mortgage to everyone.
- Bank: interest over two years
- $6,400
- Bank: set up costs
- $1,200
- Bank total over two years
- $7,600
- Private: interest over two years
- $9,600
- Private: fees
- $2,900
- Private total over two years
- $12,500
$40,000 at 8% x 2
$40,000 at 12% x 2
$800 lender, $600 broker, $1,500 legal and other
Questions people ask
Why would a bank turn me down when a private lender would not?
Federally regulated banks follow OSFI's underwriting guideline, which covers areas like loan-to-value and borrower assessment. A private lender sets its own tests and often focuses on the equity in the home. That flexibility is the reason it costs more.
Are private second mortgages regulated?
Lending and mortgage brokering rules vary by province, and OSFI's guideline applies to federally regulated institutions, not private lenders. Ask the person arranging the loan for their licence number and look it up with your provincial regulator before you share documents.
Do I need to pay my first mortgage lender anything first?
You must keep paying the first mortgage while you repay the second, says the Financial Consumer Agency of Canada. Check your first mortgage agreement for any restriction on additional borrowing, and ask the first lender if you are unsure.
Can a private second mortgage be renewed or refinanced into a bank loan?
Often that is the plan, but nobody can promise it. A bank will assess you again at that time on credit, income and equity. Ask the private lender what it charges to renew and what it charges if you repay early.
Is the higher rate the only extra cost of private lending?
No. Private loans usually add a lender fee and often a broker fee on top of appraisal, title and legal costs. Ask for every fee in dollars in writing, and add them to the interest to see the real cost.