Why Private Lending Is Surging as Banks Tighten Up

Ontario’s mortgage landscape is undergoing a dramatic transformation. As traditional lenders like banks and credit unions tighten their lending criteria, more homebuyers and homeowners are turning to private lenders for financing. This shift is reshaping the market, introducing both new opportunities and significant risks for borrowers.

Traditional Lending Shrinks, Private Lending Rises

In 2023, Ontario’s mortgage market saw a sharp contraction in traditional lending. The total number of mortgages issued by banks and credit unions dropped by approximately 30%, with the dollar value of these loans falling by about 37% compared to the previous year. In contrast, private mortgage originations declined by only 9% in number and 13% in value. ¹

This divergence means private lenders—ranging from Mortgage Investment Entities (MIEs) to individual investors—have rapidly gained ground. Their share of Ontario’s mortgage market jumped to roughly 16.8% in 2023, up from 13.5% in 2022. ¹

The reasons for this shift are clear: stricter income qualifications, higher stress tests, and rising interest rates have made it increasingly difficult for many Ontarians to qualify for a traditional mortgage. As a result, private lenders are filling the gap, providing financing options for those who may not meet the banks’ tougher requirements.

Why Are Borrowers Turning to Private Lenders?

Private mortgages appeal to borrowers who:

• Don’t meet the strict income or credit requirements of banks
• Need quick financing for time-sensitive deals
• Have unique or complex situations, such as self-employment or recent credit issues

However, these loans come at a cost. Private lenders typically charge higher interest rates and fees, and their loans are often structured as short-term, interest-only products. This means borrowers must have a clear plan (an “exit strategy”) for how they’ll repay or refinance the loan when it comes due.

FSRAO Steps Up Oversight and Regulation

With private lending’s market share growing, the Financial Services Regulatory Authority of Ontario (FSRAO) has ramped up its oversight to protect consumers. Here’s how:

1. Stricter Broker Education and Licensing

• Mortgage professionals who arrange private deals must now complete a dedicated Private Mortgages course. Level 2 agents and brokers were required to obtain this certification by March 31, 2024, ensuring they’re equipped to advise clients on the complexities of private lending.

2. Enhanced Suitability Standards

• FSRAO enforces detailed suitability assessments for private mortgage deals. Brokers must document affordability checks and ensure borrowers have a realistic exit strategy, such as refinancing with a traditional lender once their financial situation improves.

3. Active Supervision and Reviews

• Private mortgages are now a top consumer protection issue for FSRAO. In 2024, the regulator found that about 65% of reviewed private-lender transactions lacked clear documentation – a compliance gap that could expose borrowers to significant risk.

4. Consumer Awareness Campaigns

• FSRAO has launched public education initiatives, including videos, webinars, and guides, to help Ontarians understand the risks of private mortgages. These resources highlight high fees, limited lender options, and the critical importance of having an exit plan.¹

Risks and Realities for Borrowers Choosing Private Lending

While private mortgages provide crucial access to credit, they also come with heightened risks:

• Higher Rates and Fees: Private loans often carry much higher interest rates than traditional mortgages, along with additional fees for late payments or defaults.¹
• Exit Strategy Risks: FSRAO research found that 43% of private mortgage borrowers did not have a solid plan to refinance or transition to a traditional mortgage, raising the risk of default or forced sale.¹
• Collateral-Dependent Lending: Private lenders focus more on the property’s value than the borrower’s income, which can lead to unsustainable borrowing if home values decline or if the borrower’s financial situation doesn’t improve

Key Takeaways for Ontario Borrowers

1. Private lending is growing fast as banks and credit unions tighten up.
2. These loans offer flexibility but at higher costs and with greater complexity.
3. FSRAO is enforcing stricter rules and stepping up education to protect borrowers.
4. If you’re considering a private mortgage, ensure your broker is licensed, the deal is suitable for your situation, you fully understand all fees, and most importantly, you have a realistic exit strategy in place.

Final Word

As Ontario’s mortgage market tightens, private lenders are filling a critical gap for borrowers who can’t access traditional financing, but this comes with trade-offs. With FSRAO intensifying its oversight—through education, suitability checks, and supervision—borrowers now have more transparency and protection than ever. Still, in this increasingly private-driven marketplace, due diligence and professional guidance are essential to avoid costly pitfalls and ensure long-term financial stability

¹ Private Residential Mortgage Lending in Ontario report 2023. (2024, August). https://www.fsrao.ca/media/25976/download