Private Mortgages in Toronto: Legal Risks and What to Look Out For

Navigating the real estate market in Toronto has become increasingly complex, especially for homebuyers and investors seeking alternative financing. One option that has gained traction is the private mortgage. While it offers flexible lending options and faster approvals, it also comes with significant legal risks that both borrowers and lenders must fully understand before committing to an agreement.

At Mayfair Law Group, we specialize in helping clients navigate real estate transactions with legal precision, including the often-overlooked legal concerns that arise with private lending. Whether you are a first-time homebuyer or an investor purchasing property across Toronto, Kitchener, Waterloo, Guelph, Bradford, or elsewhere in Southwestern Ontario, gaining a proper understanding of the legal framework surrounding private mortgages is crucial for protecting your investment and rights.

What Is a Private Mortgage?

A private mortgage is a real estate-secured loan provided by an individual, a group of investors, or a non-bank financial entity. These lenders are not regulated in the same way traditional banks or credit unions are. Private mortgages are often used by borrowers who do not qualify for conventional loans due to poor credit, insufficient income documentation, or time-sensitive purchases. Borrowers may also seek private financing for short-term needs such as bridge financing or when a quick closing is necessary.

Because private lenders are generally more flexible, they may forgo detailed credit checks or income verifications, offering speed and accessibility. However, that flexibility often comes at the cost of higher interest rates, shorter loan durations, and fewer consumer protections. This makes private mortgages both a useful financial tool and a legal minefield if not handled correctly.

Why Private Mortgages Are on the Rise in Toronto

Over the past decade, Toronto’s housing prices have soared, while mortgage lending rules have become more restrictive. The introduction of mortgage stress tests, higher down payment requirements, and tightened income verification standards have made it difficult for many buyers, especially the self-employed, new immigrants, or those with less-than-perfect credit, to secure traditional financing.

This has contributed to the increasing popularity of private mortgages. These loans offer expedited approvals and customized lending terms, giving borrowers access to funds that would otherwise be unavailable. However, the trade-off is often steep: private loans tend to carry higher interest rates, substantial lender fees, and aggressive default clauses. Without a legal professional involved, these risks can catch borrowers off guard.

Legal Risks of Private Mortgages in Ontario

Unclear or Unregistered Mortgage Agreements

One of the most pressing legal issues in private lending is the lack of proper documentation or registration. Some private lenders operate informally, drafting agreements that are vague or not legally binding. Others fail to register the mortgage with the Land Registry Office, leaving borrowers and lenders alike exposed to legal and financial uncertainty. An unregistered mortgage may not provide legal priority in the event of bankruptcy or property sale, and it can complicate refinancing or resale efforts.

To ensure the enforceability of the loan and avoid disputes, all private mortgage agreements should be reviewed by a qualified real estate lawyer. At Mayfair Law Group, we ensure that every agreement is drafted clearly and registered properly, protecting our clients from future complications.

Unlicensed Lenders and Illegal Lending Practices

Private lenders in Ontario must comply with regulations under the Financial Services Regulatory Authority of Ontario (FSRAO). Unfortunately, many operate outside this regulatory framework, engaging in practices that may be illegal or unethical. Borrowers who deal with unlicensed lenders face a higher risk of fraud, hidden charges, and unenforceable contracts.

Mayfair Law Group helps borrowers verify the credentials of lenders and ensures that all transactions comply with provincial laws. Our due diligence process offers peace of mind and legal security throughout the financing process.

High Interest Rates and Predatory Terms

Since private lenders take on more risk than traditional institutions, they often charge interest rates significantly higher than the market average. These loans may also include large upfront fees, administrative costs, and late penalties. Some lenders structure their agreements with balloon payments due at the end of the term, placing borrowers at risk of default if they are unable to refinance.

Without proper legal review, borrowers may not realize how much they’re actually committing to until it's too late. Having a lawyer examine the term sheet, interest structure, and repayment schedule can protect you from entering into a financially unsustainable agreement.

Default and Power of Sale

If a borrower defaults on a private mortgage, the lender can begin a power of sale proceeding, which is a fast-track method of recovering the debt without going to court. While legal, power of sale allows the lender to take control of the property and sell it,sometimes below market value,leaving the borrower with little say in the process.

Borrowers often misunderstand how quickly a power of sale can proceed and how limited their rights may be once the process is underway. At Mayfair Law Group, we assist borrowers in managing default situations and provide strategic legal support to negotiate timelines, prevent improper notices, and protect home equity.

Lack of Independent Legal Advice (ILA)

In almost all private mortgage transactions, the lender will require the borrower to obtain Independent Legal Advice (ILA) before closing. This requirement isn’t just a legal formality,it serves as critical protection for both parties. Through ILA, the borrower is made fully aware of their rights and obligations under the mortgage, reducing the risk of later disputes or claims of coercion.

Skipping ILA can lead to serious consequences, including the inability to challenge the terms of the agreement or mount a legal defense in case of conflict. Mayfair Law Group provides professional, unbiased ILA to help clients make informed decisions about their private mortgage contracts.

What to Look for Before Signing a Private Mortgage

Entering into a private mortgage is a major financial commitment. Before signing, both borrowers and lenders should ensure the agreement is comprehensive and legally sound. Important components to review include:

• The repayment schedule, including interest-only or principal-and-interest options
• The registered charge on the property and its position in the title hierarchy
• Prepayment clauses and associated penalties
• Clear definitions of what constitutes a default
• The timeline and procedures for power of sale or foreclosure
• Renewal and refinancing options, including interest rate adjustments

Even if the deal seems straightforward, overlooking any of these areas could lead to legal issues. Working with an experienced real estate lawyer ensures your interests are protected before, during, and after the transaction.

How Mayfair Law Group Can Help

Mayfair Law Group supports clients throughout Toronto, Kitchener, Waterloo, Guelph, Bradford, and other parts of Southwestern Ontario with a full range of private mortgage legal services. Our team provides expert legal review and representation in private lending situations, whether you are borrowing, lending, or involved in a dispute.

Our services include:

• Contract Review & Negotiation: Identifying risks in your mortgage documents and proposing protective terms.
• Due Diligence & Compliance: Ensuring all parties comply with FSRAO regulations and applicable provincial laws.
• Title Search & Registration: Confirming clean title and proper mortgage registration to protect security.
• Independent Legal Advice: Offering impartial guidance so borrowers understand their legal rights and financial obligations.
• Dispute Resolution: Representing clients in negotiations, mediations, or court actions in the event of a conflict.

Case Example: Borrower Avoids Foreclosure Through Legal Intervention

A homeowner in Waterloo contacted our office after receiving a power of sale notice from a private lender. Upon review, we discovered that the lender had not followed the legal notice requirements under Ontario’s Mortgages Act. Acting quickly, we halted the sale, negotiated with the lender, and secured a repayment extension. Our intervention protected the client's home, allowed time to refinance, and prevented unnecessary litigation.

Final Thoughts: Private Doesn’t Mean Informal

Private mortgages can be valuable tools for short-term financing or unique situations,but they must be approached with the same level of legal scrutiny as any institutional loan. Informal agreements, unregistered security, and predatory terms are just a few of the risks borrowers face without proper legal guidance.

If you’re considering a private mortgage, it's essential to engage experienced legal counsel from the outset. Mayfair Law Group has the knowledge, experience, and dedication to help you avoid costly mistakes and move forward with confidence.

Speak with a Real Estate Lawyer in Toronto Today

Whether you’re a borrower or lender, don’t navigate the world of private mortgages alone. Mayfair Law Group is here to help you make informed decisions, draft sound agreements, and protect your real estate investments.

CONTACT MAYFAIR LAW GROUP