This article will explore how to become a private lender in Canada. It is based on my experience investing in or directly funding over 100 private loans, including:
I’ve loaned in Ontario, Alberta, BC, Manitoba and Newfoundland (depending on the loan product). I granted my first loan in 2013.
My objective in this post is to address important questions about private lending and to help you make more informed decisions about extending credit.
1. I provide private loans (unsecured and mortgages) across Canada primarily through a company, Assadi Private Capital, Inc. We are a direct lender, rather than a broker or financial advisor, etc. The company is a member of the Canadian Lenders Association.
Assadi Private Capital, Inc. is privately-owned and without investors.
2. There are broad regulatory changes taking place in Canada’s private lending industry. For years many of the rules were set by provinces. Provincial legislation will now be further augmented by federal updates.
3. Private lending opportunities should be assessed individually and carefully. Please don’t rely on this post to make lending decisions.
4. I posted this article in 2021 and updated it a few times, most recently in January 2024.
5. The article ends with a link to "Advanced Private Lending Strategies"
Private lending is a transaction whereby a non-bank/credit union lender loans money to a borrower. The debt is often backed by collateral (real estate, vehicles, etc.), but it can also be unsecured.
Examples of private lenders include:
The lender earns a return by charging interest and fees. The borrower makes loan payments on a monthly basis (other payment schedules exist, too) until the debt is repaid.
In almost all cases, private loans are substantially pricier than borrowing from traditional lenders. That’s because banks, credit unions and caisses populaires (Quebec) usually have more capital to lend. The Royal Bank of Canada, for example, has a market cap of $190 billion as of February 2023. Charging 5% interest on a $1 billion loan portfolio yields an annual return of $50 million.
Most private lenders are comparatively tiny. They must therefore charge higher rates to reflect:
Further, banks and bank-like lenders cross-sell their products. A mortgage customer can later open a credit card, deposit funds in a chequing account, buy insurance, invest in bank-managed portfolios and trade through bank-owned brokerages. There are multiple revenue streams.
Private lenders have two sources of income: interest and fees.
Private loans can have terms of any range, but they are typically between 3 months and 5 years. A “term” or “maturity date” is when the loan must be repaid.
If the borrower defaults on the loan agreement (usually a result of missing payments), then the private lender can attempt to recoup their funds by foreclosing on the property. A “foreclosure” or “power of sale” is a legal process where the collateral is possessed by the creditor/court and then sold. The proceeds of the sale are used to repay the creditors. The remainder, if any, would be available to the borrower.
Before 2024 the highest legal interest rate in Canada was 60% per annum. It was reduced to 35% by the federal government and may further decrease.
Customers of private lenders in Canada are often assumed to be in financial distress. Why else would they accept a high-interest loan if they could borrow from a bank and pay less?
Indeed, that category of borrower exists. But it’s far from the only one. Canadian banks’ lending requirements are strict and can exclude all sorts of borrowers, including people and companies who:
There is a large group of borrowers who don’t fit within “the box.” They can include:
There is no minimum amount of money required to be a private lender. People and businesses seek loans of all sizes, so it depends on what you can afford. However, in addition to having the capital for the loan, private lenders often budget for legal expenses. These are typically incurred when hiring a lawyer to draft the loan agreement and other documents, as well as registering the mortgage on the borrower’s property if it’s a secured loan.
Lenders can incur additional legal fees if the property goes into foreclosure.
Practically speaking, a mortgage loan is seldom worth doing with less than $50,000. That’s because the legal fees associated with granting a loan, often several thousand of dollars, can be prohibitive for smaller deals.
An unsecured loan could be done with far less, though.
Note: it is standard to require borrowers to reimburse professional fees.
Oftentimes the loan process begins with a Loan Offer Letter (also known as a Commitment Letter). This is a document that makes an offer to lend money to a borrower, subject to terms and conditions that the borrower must fulfill in order to secure financing.
For example, if it’s a mortgage, an offer letter might require the borrower to provide the private lender with an appraisal of the property’s value.
An offer letter is a contract. It is legally-binding and should be drafted by a lawyer.
An offer letter’s purpose is twofold:
First, it indicates to a prospective borrower that the private lender is ready to proceed with a loan, but first requires certain documents (such as appraisals, credit checks, tax returns, etc.) for due diligence.
Second, it helps manage the private lender’s risk by ensuring both parties are serious about entering into a loan agreement. Otherwise, the lender may waste resources by hiring a lawyer to draft the loan documents, only for the borrower to pull out of the deal.
Private lenders in Canada often charge an up-front fee to borrowers in addition to interest. This fee is generally deducted from the funds advanced. For example, if you are granting a $100,000 loan with a 2% fee, then you would only release $98,000 to the borrower. However, interest would still be charged on $100,000.
Lender fees might be called an:
Private loans can be structured in various ways, depending on what is agreed by the borrower and lender. The most basic components of a loan include:
A loan can be secured against real estate through the use of a mortgage.
A cornerstone of secured lending is understanding the value of the collateral – in this case, real estate. If the loan goes into default, the private lender may choose to exercise their right to seize and sell the property. As such, private lenders aim to ensure that the property is worth at least more than all debts that have been registered against it. These can include:
The foregoing can be discovered by running a title search on the subject property, which your lawyer can do for you.
In addition, private lenders in Canada generally aim to leave room for fluctuating real estate prices, realtor fees, legal fees, disbursements and taxes. If they don’t, their risk of capital loss can increase.
In most cases private lenders request an independent appraisal, the costs of which are generally shouldered by the borrower. However, the appraisal should be addressed to the lender. Be advised that appraisals can take weeks to complete.
Private lenders generally use a Loan-to-Value (LTV) ratio to help assess the risk of lending too much money against a piece of real estate. This can be calculated by dividing the mortgage balance by the property value. It is usually expressed as a percentage.
The higher the LTV, the greater the risk. For example, a 100% LTV means that there is no equity remaining in the property. A commonly-used standard is 75% to help indicate medium-risk private loans.
Virtually any sort of real estate that can be mortgaged is available to Canadian private lenders. This includes:
In the event of a sale or foreclosure, debts are repaid in the order that they were registered on the property. The first mortgagee (lender) would be paid first, the second mortgagee would be paid second and so on. It is possible for a property to lack the equity to repay all debts. For that reason, it is safest to have the earliest possible mortgage rank.
As an example, if there is a property that has a first mortgage from a bank, a court judgement in second position and a mortgage from a private lender, the debts would be repaid in the following order:
Keep in mind that a foreclosure proceeding can cost each party thousands of dollars in legal fees, thus further consuming a property’s available equity.
Hint: if you’re lending a second or third mortgage, consider verifying the status of the prior loans and ensuring that they are good standing. This can be done by requiring the borrower to provide you with recent mortgage statements. If the borrower is in default, then you might reconsider whether you want to lend to them.
Owing a tax balance can cause the government to register a lien against the property. Tax debts are generally considered dangerous to private lenders for that reason. Moreover, substantial property tax arrears may preview the borrower’s ability to make payments to other creditors.
It is standard practice to require a borrower to secure fire insurance on a subject property. This helps protect the private mortgage lender’s investment throughout the lifetime of the loan.
Note: I never skip this step. I once had a property partially burn down and was protected by insurance.
Although earning interest and fees is great, private lenders generally want to know how the borrower is going to repay the debt. Oftentimes, but not always, it’s through the sale of the secured property. A common method of private lending is to try to align the loan repayment date with the exit strategy. Otherwise, the borrower may not be able to repay the lender upon maturity. Exit strategies can include:
An important part of compliance requirements in Canadian private lending relates to money laundering. An expanded set of rules take effect in October 2024, which include FINTRAC reporting.
Unfortunately, our real estate market is ripe for that activity. Criminals buy property here using illegal funds often attained through drug trafficking and other serious offences. As well, corrupt foreign governments send agents to Canada to locate real estate through which stolen wealth can be stored and obfuscated. After the properties are acquired, they sell or remortgage them to "clean" their funds. This makes it hard to differentiate legitimate from illicit capital.
There is no unified regulatory private lending regime in Canada. Other compliance considerations include:
It’s necessary to know the rules before engaging in private lending.
It’s important to involve a lawyer who is experienced in private lending. The private lender’s counsel will draft the loan agreement/promissory note and other documents related to the mortgage loan. They will also register the mortgage on the subject property. This will help ensure that the capital is protected. You might also inquire in advance about whether your lawyer can assist in the foreclosure process if necessary.
Tip: ask your lawyer about mortgage lending and consumer protection regulations in the jurisdiction in which you wish to lend.
Private lenders in Canada often require borrowers to reimburse them for their out-of-pocket expenses, such as legal fees. For example, if you wish to lend $80,000 and expect to pay $3,000 to a lawyer in order to do so, then you might require the borrower to repay you $83,000 plus interest. Or, you might only advance $77,000 to the borrower. Otherwise, nearly 4% of your capital will be spent on legal fees.
Including reimbursements can be an effective way to reduce risk because it passes on the lender’s expenses to the borrower.
It’s important to have a relationship with a lawyer in Canada who is experienced in private lending. They should:
A lawyer is a necessary part of a private lender’s team. You should not attempt to become a private lender without one.
In my experience, lawyers will charge between $2,500 to $7,000 to represent the lender in a private lending transaction in Canada. However, your fee will range based on the complexity of the deal and your counsel’s hourly rate. Legal fees increase when:
Disorganized and complicated loans will cost more. They are common and should be expected by private lenders (otherwise they would be funded by banks). One method to control expenses is to perform as much due diligence as possible before involving your lawyer.
As mentioned, it is industry standard for borrowers to reimburse lenders for their legal expenses.
Most law firms in Canada offer real estate services and can facilitate a private loan. However, your lawyer should also know the provincial rules surrounding mortgage lending and consumer protection.
There are various law firms to choose from. Canada’s national law firms are usually more expensive, but they can more easily cater to loan transactions across the country. Local firms might be more suitable for intra-provincial deals.
Anyone in Canada can grant a loan to another person. However, different provinces have separate laws regarding mortgage lending, credit granting and consumer protections. There are also federal rules. It’s helpful to involve a lawyer for those reasons.
As discussed, there is no sole regulator governing private lending in Canada. Rather, the compliance framework is a hodgepodge of national and provincial laws.
Some provinces, like Saskatchewan, require private lenders to secure a license.
Some, like Ontario, require private lenders to go through a mortgage broker or to be brokers themselves.
Some have no licensing requirements at all.
I have found private lending to be simplest in Alberta, Ontario, Newfoundland and Manitoba. As such, that’s where I do most of my business.
Yes. There are innumerable pooled mortgage funds, mortgage investment corporations and mortgage syndications in Canada. All of these programs are examples of private lenders raising capital from investors.
However, doing so requires compliance with applicable provincial securities legislation. This is a substantial undertaking that comes with additional responsibility and risk. For example, depending on how you intend to raise capital from the public, your legal fees alone can range from $5,000 to $100,000.
Not necessarily. Some lenders focus on the amount of equity available in a property, rather than on a borrower’s credit score. However, if you make a private loan through a mortgage broker, it is likely that they will have already conducted a credit check on the borrower.
In Canada, returns generated from private lending are generally taxed as interest income. This includes any fees that are charged to borrowers. You may wish to speak with an accountant about whether you should lend personally or through a business entity (it will vary depending on your personal situation).
It is possible to shelter your private lending returns from taxes by granting loans through a registered account, such as an RRSP or a TFSA. Companies like Canadian Western Trust can facilitate this for you. I have never done it before.
Private lenders in Canada can generally provide financing faster than banks. There is less red tape and fewer regulations to abide by. In my experience, the longest step in the loan process is waiting for the property appraisal to be completed. This can sometimes take weeks, depending on location and the appraiser’s availability.
However, oftentimes mortgage brokers who facilitate private loans already have appraisals in their possession. Some private lenders in Canada can close within a few days of receiving the appraisal.
There are seven stages in a standard private loan (in good standing).
The private lender makes an offer to a prospective borrower. The offer is accepted and all parties get to work.
The prospective borrower provides the private lender with the documentation required via the commitment letter.
The private lender’s lawyer prepares the loan and mortgage agreements. They should also conduct further due diligence on the private lender’s behalf, such as running tax and bankruptcy searches, etc.
The prospective borrower signs the loan with their own counsel.
Funds are released to the borrower, often through a lawyer’s trust account.
The borrower makes loan payments to the lender pursuant to the loan agreement.
The private lender is repaid.
The private lender’s lawyer should discharge the mortgage after the debt has been repaid in full.
Joe and Marcy are neighbours who each own a single-family home in Toronto, Ontario. Joe wants to perform some minor renovations on his property and needs $50,000 to do so. He plans to repay the loan by selling his house in one year. He believes that his renovations should add about $90,000 of value to it. Joe has a steady job now, but his credit rating is poor after losing his prior job and being unemployed for six months due to uncertainties surrounding COVID-19. During that time he allowed two credit cards to lapse, though he has since paid them in full.
Marcy sees an opportunity to help a friend and earn a tidy profit. She agrees to give Joe a $50,000 loan, the terms of which are outlined in a Loan Offer Letter. In it, among other things, she requests from Joe a letter from his employer confirming his salary, a copy of his last year’s tax returns, his most recent mortgage statement and an independent appraisal of the property that she will mortgage. The Loan Offer Letter specifically requires the property to be worth over $900,000 with a mortgage balance of under $600,000. It also requires Joe to cover Marcy’s legal expenses. After Joe signs it, Marcy hires a lawyer to facilitate the transaction.
Marcy’s lawyer runs a title search on Joe’s house and finds only one existing charge on the property: as expected, a mortgage from a bank. There are no outstanding property taxes. Marcy also reviews the due diligence documents from Joe, which take about three weeks for her to receive.
Marcy’s lawyer then prepares the promissory note and mortgage documents for Joe to sign with his own counsel. After the paperwork is executed, the mortgage is registered and Marcy is at liberty to release $50,000 to Joe. However, she deducts her legal expenses and an origination fee (as disclosed in the offer letter) from the funds advanced.
The following month, Joe makes his first interest payment to Marcy.
There are several advantages that private lending can provide:
Private lenders typically use mortgages to secure their loans. A mortgage is a legal instrument that generally prevents the borrower from selling or otherwise transferring a property without first repaying the mortgagee. As such, private loans are backed by hard collateral.
Private lending can be a relatively passive investment and an income producing asset. In the best-case scenario, the private lender issues a loan and collects monthly interest payments until the maturity date. Upon which, the loan is repaid and the mortgage is discharged.
Private lending can be lucrative. It is not uncommon to see interest rates range from 6% to 20% per annum, plus fees. However, higher returns usually come with more risk.
Private lenders have a degree of direct control over their investment. For instance, if a borrower defaults on their obligations, the private lender can decide whether to demand immediate repayment of the loan or to allow time for the loan to be brought back into good standing.
They can also communicate directly with their customers.
Private lending is not correlated to the stock market. While share prices may rise and fall, private lenders can enjoy steady interest payments throughout the lifetime of the loan.
Private lenders can have a direct positive impact on their community. For example, their capital can finance:
Private lending is a risky investment. It is illiquid and can result in a complete loss of capital, especially if real estate prices crater. Moreover, private lenders may need to spend thousands of dollars in legal fees during the foreclosure process if a loan goes into default. The collections process can also require a substantial investment of time and effort.
Defaults are common and loans can be brought back into good standing. However, if a borrower does not pay their loan for several months, a private lender may then decide to foreclose on the property. The foreclosure process varies in each province, but it generally allows the lender to take possession of the property and sell it on the open market.
You may already have a private lending deal that’s ready to be funded. Perhaps you’ve found a borrower with substantial collateral. You’ve done your research and you’re ready to extend credit.
If you don’t have a deal lined up, there’s no need to worry. There are plenty to choose from. Many private lenders find loan opportunities through mortgage brokers. In fact, a cursory Google search can retrieve various Canadian firms offering mortgage investment opportunities.
Below are best practices that I follow, which are sometimes required by provincial law.
Private lending is considered risky when compared to traditional investments. However, many of those risks can be managed through careful due diligence. For example, a private lender might develop a policy of not lending above a 65% loan-to-value, requiring a cosigner for all deals and only lending in high-volume real estate markets. It’s not possible to eliminate all risks, but they do have several tools at their disposal. Furthermore, there are numerous lending opportunities available across Canada.
My experience as a private mortgage lender in Canada has been a mostly positive one. I’ve found it be to be a the best risk-adjusted investment for my preferences. Here are some lessons I’ve learned:
We use cookies to analyze website traffic and optimize your website experience. By accepting our use of cookies, your data will be aggregated with all other user data.