The Hidden Costs of a Private Mortgage Nobody Tells You About

Start with two numbers, not one

Every private mortgage has a gross loan amount and net proceeds. The gross amount is the mortgage registered on title. Net proceeds are what remains after the items paid from that mortgage have been deducted. If the mortgage is also paying off an existing loan, property-tax arrears, or unsecured debts, those payouts reduce the cash that reaches you too.

Suppose the approved mortgage is $200,000. That does not tell you how much is available for a renovation, business need, or emergency. You need a written estimate that starts at $200,000 and subtracts every expected fee, legal account, appraisal charge, payout, and adjustment. Ask for that estimate before committing, then compare it with the final statement prepared by your lawyer.

The most useful question is simple: “After everything that must be paid on closing, how much will be left for me?” A rate quote can't answer that by itself.

The lender fee

A private lender may charge a lender fee for underwriting and making the capital available. It is usually disclosed in the commitment or term sheet and commonly paid from the mortgage advance rather than by cheque in advance. The amount varies with the loan, position on title, property, location, risk, and lender. There isn't one responsible percentage to quote for every deal.

Because the fee may be stated as a percentage, translate it into dollars. One percent of a $200,000 mortgage is $2,000; one percent of $600,000 is $6,000. The same-looking percentage creates a very different cash cost. Also ask whether the fee is earned when you accept the commitment, only when the mortgage funds, or under another condition. That detail matters if you change direction after the lender has started work.

The brokerage fee

Private and alternative mortgages can include a brokerage fee for arranging the loan. This is different from many standard residential bank mortgages, where compensation is often paid by the lender. The brokerage fee should be disclosed clearly, in dollars or in a way that lets you calculate the dollar amount, before closing.

Be cautious about any request to send an unexplained fee to a personal account or to pay before you have written terms. Legitimate charges should connect to disclosed work, a named party, and proper documentation.

Legal fees can appear on both sides

The lender has legal work and the borrower needs legal advice. In many private transactions, the borrower is responsible for the lender's reasonable legal costs as well as the account from the borrower's own lawyer. Separate representation protects the parties when their interests differ, but it means the budget must account for more than one legal bill.

Legal cost depends on the file. A straightforward registration is different from a rushed closing with several payouts, title defects, postponements, discharges, or a power-of-sale deadline. Searches, registration charges, title insurance, courier costs, and taxes on professional fees may also appear as disbursements.

The appraisal is a real cost—even if the deal changes

Most private lenders want an appraisal from a qualified appraiser they accept. The borrower generally pays for it. Price depends on the property and assignment: a standard condo is not the same job as a mixed-use building, rural acreage, or a partially completed renovation.

The appraisal fee pays for the valuation work, not for a particular result. If the value comes in lower than expected and the lender reduces the mortgage, the appraisal has still been completed. If you order a report before confirming that the lender accepts that appraiser, you may end up paying for a second report. Get the lender's appraisal instructions first.

Renewal, extension, and discharge costs

Many private mortgages are short-term loans. If the exit plan isn't ready at maturity, renewal may involve a new lender fee, brokerage work, legal charges, or a higher rate. There may also be an extension fee if repayment is late. At payout, discharge and administration charges can apply. These aren't side issues: a second year can materially change the economics of the original decision.

Before taking the mortgage, put a date on the exit plan. If the plan is to refinance after improving credit, what specific improvement is needed? If it is to sell, when will the property be listed? If it depends on finishing renovations, is the budget funded and realistic? “We'll figure it out next year” is not an exit strategy.

A sample cost worksheet

A useful worksheet has three columns: amount, who receives it, and when it is paid. Start with the gross mortgage. Subtract the lender fee, brokerage fee, lender's legal account, your legal account, appraisal, title-related expenses, interest adjustment or reserve, existing mortgage payout, property taxes, and any debts being cleared. The result is estimated net proceeds.

Then calculate the carrying cost separately: monthly interest payments, any required property-tax or insurance payments, and the amount needed to discharge at maturity. Finally, write down the possible renewal cost if the planned exit does not happen. This is more useful than comparing rates alone because it shows both today's cash and tomorrow's obligation.

Costs vary by file, so a sample should never be presented as your quote. Your own disclosure documents and lawyer's statement are the numbers that matter.

When the higher cost can still make sense

A private mortgage can be rational when it solves a time-limited problem and the benefit is greater than the total cost. Examples might include completing a purchase after conventional financing falls through, stopping more expensive debt from compounding, or buying time to sell a property in an orderly way. It can be a poor fit when there is no credible way to repay it or when the borrower needs a long-term loan but can only afford the opening short-term payment.

Trustworthy advice doesn't hide the expensive parts. It puts every charge beside the purpose of the loan and asks whether the result still improves the borrower's position. If the numbers only work by ignoring renewal, legal costs, or a lower-than-expected appraisal, they don't work yet.

Frequently asked questions

Are private mortgage fees paid upfront?

Many fees are deducted from the mortgage advance on closing, but the appraisal may be paid earlier and commitments can contain different terms. Confirm each fee, its recipient, and when it becomes payable in writing.

Why does the borrower pay the lender's legal fees?

The lender requires legal work to review and register its security. In many private mortgage transactions, the commitment makes those reasonable costs the borrower's responsibility in addition to the borrower's own legal account.

How can I compare two private mortgage offers?

Compare the net proceeds, monthly payment, total fees, legal and appraisal estimates, term, prepayment rules, maturity balance, renewal terms, and exit plan—not only the advertised interest rate.