WHAT IS A PRIVATE MORTGAGE?
The Law Society of Ontario defines a private mortgage as “a mortgage agreement that is issued by an individual, a corporation, or a partnership, that is not a bank listed in Schedule I or II of the Bank Act, a pension fund, a trust corporation, an insurance company, or an entity that does not lend money in the ordinary course of business”. Examples of private mortgages include mortgages issued through investment corporations, syndicated mortgages, and mortgages issued by an entity that does not lend money in the ordinary course of business. Private mortgages are typically equity-based and are likely approved based on the market value or marketability of the real property. This enables individuals with a poor credit history or lower annual income to convince a private lender to fund their mortgage. Private mortgages typically have higher interest rates when compared to institutional mortgages, since private loan products are riskier for the lender. Unlike institutional lenders, who may offer a variety of secured and unsecured loan options, private lenders may only specialize in certain loan options, such as secured private mortgages.
OBTAINING A PRIVATE MORTGAGE
The process of obtaining a private mortgage typically starts with an application made through your broker who may ask you to provide information about properties you own, your assets, liabilities, income, credit report, and employment history. In our experience, lenders who conduct more extensive due diligence typically provide lower interest rates. Once your application has been approved, you will receive a commitment letter that sets out the terms and conditions of the mortgage. You should carefully review the commitment letter to ensure that the terms set out there are satisfactory to you. We find that clients who do not review the commitment letter with their lawyer are often surprised when they receive the statement of advance from the lender which sets out the deductions from the mortgage proceeds. Once you sign the commitment letter the lender will typically request that you provide a small retainer so that their solicitors may begin the preparation of the documents.
The next step involves the lender’s solicitor preparing the mortgage documents and sending them to your solicitor. Your solicitor will then review the documents to ensure the terms set out there are satisfactory to you and match what was set out in the commitment letter. At this stage, you should work closely with your solicitor to provide them with the documents and information they require. Please note, that the borrower is typically responsible for the legal fees and disbursements of both the borrower’s solicitor and the lender’s solicitor.
CAN A LAWYER REPRESENT BOTH A LENDER AND BORROWER IN A MORTGAGE TRANSACTION?
As per the Rules of Professional Conduct, a lawyer cannot represent both a private lender and borrower in a mortgage transaction, if the loan or mortgage is valued over $75,000.00. If the loan or mortgage value is under $75,000.00, then a single lawyer can represent a private lender and borrower. Exceptions to this rule include instances where the lawyer practices in a remote location and retaining separate counsel would be inconvenient for the parties, where the private lender and borrower are not at “arm’s length”, and where the private lender is selling real property and the private mortgage represents part of the purchase price. Prior to signing a commitment letter, we recommend that you request that your lawyer provide you with an estimate of all costs involved in the transaction, so you are not surprised on the closing date.
Contact us if you need legal assistance with your real estate transaction. Our real estate law team has the experience and knowledge to assist you throughout every step of the transaction.
1. Law Society of Ontario: Definitions and Terms.
Disclaimer: The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please Contact us.
About the Author:
Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.