Private mortgage investing has become an area of interest for Canadians looking for alternatives to traditional fixed-income investments. The attraction is understandable: instead of purchasing a property, managing tenants or taking on the responsibilities of being a landlord, an investor can lend money secured by real estate and earn income from the mortgage.
But there is an important distinction between a high interest rate and a good investment.
A mortgage paying 12% is not automatically better than one paying 8%. The investor also needs to consider the property’s value, loan-to-value ratio, mortgage position, borrower, repayment plan, legal structure, fees, term, liquidity and what could happen if the borrower does not repay as expected.
Private mortgage investment returns are generated primarily from interest and, depending on the mortgage structure, certain lender fees. The investor’s actual return can be affected by expenses, payment delays, defaults, enforcement costs and taxes. Private mortgage investments are not guaranteed, and investors can lose some or all of their principal.
This guide explains how private mortgage investment returns work, how to calculate them, what affects the return, how risk and return are connected, and what investors should examine before committing capital.
There is no single return that applies to every private mortgage investment.
The interest rate is negotiated according to the characteristics and risk of the individual mortgage. A mortgage with a lower loan-to-value ratio, strong property security and a straightforward repayment plan may have a different rate from a higher-risk mortgage with greater leverage or a more complicated exit strategy.
More importantly, the interest rate is not the same thing as the investor’s final return.
A useful way to think about it is:
Gross mortgage income − applicable expenses and losses = net investment return
For example, if $100,000 is invested in a mortgage earning an assumed 10% annual interest rate, the gross annual interest would be $10,000 if the money remained fully deployed for the entire year.
That does not automatically mean the investor has earned a 10% net return.
There may be legal or administrative costs, periods when capital is not deployed, payment problems, losses or other expenses depending on how the investment is structured.
The right question is therefore not simply:
“What interest rate am I getting?”
It is:
“What return am I realistically expecting after considering the structure, costs and risks of this particular mortgage?”
What Is a Private Mortgage Investment?
A private mortgage investment is essentially a lending arrangement backed by real estate.
Instead of a bank providing the entire mortgage, an individual investor or group of investors provides some or all of the mortgage capital.
The borrower receives the funds and agrees to repay the mortgage according to the terms of the agreement. The investor earns interest for providing that capital.
The mortgage is generally registered against the property as security.
For example:
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A property is valued at $800,000.
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The borrower needs $400,000.
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An investor provides the mortgage funds.
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The mortgage is registered against the property.
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The borrower pays interest according to the agreed terms.
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At maturity, the borrower repays the principal or refinances/sells the property according to the agreed exit plan.
The investor does not normally participate in the property’s future appreciation simply because the mortgage is secured by the property.
If the property increases from $800,000 to $900,000, the lender generally remains entitled to the contractual interest and repayment of principal—not a percentage of the $100,000 increase in property value.
That is one of the fundamental differences between mortgage lending and property ownership.
Where Do Private Mortgage Investment Returns Come From?
The largest source of return is normally the interest paid by the borrower.
Depending on the mortgage and investment structure, other income may also be involved.
1. Mortgage Interest
Interest is the primary source of income for a mortgage investor.
For example, assume:
Investment: $100,000
Interest rate: 9%
Term: 12 months
If the full $100,000 remains outstanding for the entire year:
$100,000 × 9% = $9,000 gross interest
The calculation becomes more complicated if the mortgage is funded or repaid partway through the year.
For example, if the mortgage is outstanding for only six months:
$100,000 × 9% × 6/12 = $4,500
This is why the actual deployment period matters when evaluating an investment.
2. Lender Fees
Some mortgage structures include fees paid by the borrower at the time the mortgage is arranged.
The treatment of those fees depends on the agreement and the investment structure.
An investor should not automatically assume that every fee paid by a borrower becomes additional investor income.
Before investing, ask:
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Who receives the fee?
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Is it paid to the investor?
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Is it paid to a brokerage or administrator?
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Is it deducted from the mortgage advance?
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Is it included when calculating the quoted return?
Understanding the answer can make a significant difference when comparing two opportunities.
3. Renewal or Extension Income
A borrower may need additional time to repay a mortgage.
Depending on the mortgage agreement, an extension or renewal may involve additional interest or fees.
However, investors should be careful about treating extension income as guaranteed or automatically positive.
A borrower needing an extension could also indicate that the original exit strategy has not worked as expected.
That makes the reason for the extension just as important as the additional income.
4. Other Charges
Depending on the mortgage terms, additional amounts may arise from situations such as missed payments, returned payments, early repayment or other contractual charges.
These should be reviewed individually rather than assumed as part of an expected annual return.
Gross Return vs. Net Return: Why the Difference Matters
One of the biggest mistakes investors can make is focusing on the headline interest rate without understanding what actually reaches the investor.
Consider a simplified example.
An investment generates:
$10,000 gross interest
Suppose there are:
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$500 in applicable investment expenses
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$300 in other costs
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$200 attributable to a period when funds were not deployed
The amount remaining would be:
$10,000 − $500 − $300 − $200 = $9,000
On a $100,000 investment, that represents a 9% return before personal income tax.
This is a simplified illustration—not a statement of typical private mortgage investment performance.
The exact calculation depends on the investment structure.
The key distinction is:
Gross yield = what the underlying mortgage earns.
Net return = what remains after applicable investment expenses, losses and other deductions.
After-tax return = what remains after the investor’s applicable tax treatment.
Lendmax’s current investor education content makes this distinction a central part of evaluating mortgage investment returns.
For an investor comparing opportunities, net return is generally more useful than a headline rate.
A Simple Example of Calculating a Private Mortgage Investment Return
Suppose an investor provides:
$150,000
Assume the mortgage produces:
9% annual interest
If the capital remains fully invested for 12 months:
$150,000 × 9% = $13,500 gross interest
Now suppose, purely for illustration, that $1,000 of applicable costs reduces the amount retained.
The simplified result becomes:
$13,500 − $1,000 = $12,500
The resulting return before personal tax would be:
$12,500 ÷ $150,000 = 8.33%
This example demonstrates why investors should look beyond the advertised interest rate.
The same 9% mortgage rate can produce different realized outcomes depending on:
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how long the money remains invested
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whether interest is paid as expected
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fees and expenses
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whether the mortgage is repaid early
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whether funds sit idle between investments
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whether a borrower defaults
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enforcement and recovery costs
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the investment structure
What Determines the Return on a Private Mortgage Investment?
Private mortgage rates are not selected randomly.They generally reflect the risk associated with the mortgage.
Several factors deserve careful attention.
1. Loan-to-Value Ratio
Loan-to-value, or LTV, compares the mortgage amount with the property’s value.
For example:
Property value: $800,000
Mortgage: $400,000
LTV:
$400,000 ÷ $800,000 = 50%
A 50% LTV means there is substantial property equity beneath the mortgage.
Now consider:
Property value: $800,000
Mortgage: $680,000
LTV:
85%
The second mortgage has much less equity protection.
If the property value falls, selling costs arise, or enforcement takes longer than expected, the higher-LTV investment may have a smaller margin for error.
This is why an investor should never look at the interest rate without looking at the LTV.
A higher rate can come with substantially higher risk.
Why LTV Matters More Than the Interest Rate Alone
Consider two hypothetical opportunities.
Investment A
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$100,000 mortgage
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60% LTV
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8% interest
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Strong property location
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Clear repayment plan
Investment B
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$100,000 mortgage
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85% LTV
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12% interest
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Less predictable repayment plan
At first glance, Investment B looks better because 12% is higher than 8%.
But the investor is being compensated for taking additional risk.
The better question is:
Which investment provides the more appropriate balance between expected return and risk?
There is no universal answer.
That decision depends on the investor’s objectives, risk tolerance and ability to withstand a loss.
2. Mortgage Position
The mortgage position is another critical factor.
A first mortgage generally has priority over mortgages registered behind it.
For example:
Property value: $1,000,000
First mortgage: $500,000
Second mortgage: $100,000
Total mortgage debt: $600,000
The first mortgage generally has priority over the second mortgage in the event of enforcement.
That means a second-position investor needs to examine not only the property’s total value, but also the amount of debt ahead of the investment.
A second mortgage can therefore carry a materially different risk profile from a first mortgage even when the property’s value is identical.
3. Property Type and Location
The security is only as useful as the underlying property and the market in which it is located.
An investor should consider:
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Where is the property?
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What type of property is it?
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Is there strong demand for comparable properties?
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How easy would it be to sell if required?
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Is the valuation supported by recent comparable sales?
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Are there unusual zoning or title issues?
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Is the property complete or under construction?
A property in a highly liquid market may present a different recovery profile from a specialized property in a thin market.
The valuation should also be independently supported rather than relying solely on a borrower’s estimate.
4. Borrower Profile
The property is important, but the borrower matters too.
Investors should understand why the borrower needs private financing.
For example, private financing could be used for:
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a temporary financing gap
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a purchase closing
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debt restructuring
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refinancing
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an investment property
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construction or development
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a borrower who does not currently fit conventional lending requirements
The important question is:
Why is private financing required, and how will the borrower repay it?
A strong property does not eliminate every borrower-related risk.
5. The Exit Strategy
The exit strategy is one of the most important parts of a private mortgage investment.
It answers a simple question:
Where will the money to repay the mortgage come from?
Possible exits can include:
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refinancing with a bank
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refinancing with an alternative lender
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selling the property
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completing construction and refinancing
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selling an investment property
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receiving proceeds from another transaction
Suppose a borrower takes a one-year private mortgage with the intention of refinancing with a conventional lender after improving their financial position.
The investor should understand:
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What must change before the refinance?
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Is the borrower’s income sufficient?
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Is the property likely to qualify?
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What happens if the refinance does not occur?
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Is there sufficient equity for another lender?
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What happens if property values decline?
FSRA emphasizes the importance of a viable exit strategy in private mortgage transactions because the repayment plan directly affects both borrower suitability and lender/investor risk.
A mortgage with no credible repayment plan should receive much more scrutiny, regardless of the advertised rate.
6. Mortgage Term
Private mortgages often have shorter terms than conventional long-term mortgages.
A shorter term can be attractive because the investor may have the opportunity to reassess the investment sooner.
But there is another side to that equation.
When the mortgage matures, the investor needs to know what happens to the capital.
If the borrower repays the mortgage:
The investor receives the principal back and must decide where to deploy it next.
If the borrower needs an extension:
The investor needs to assess why.
If the borrower cannot refinance or sell:
The investor may face a longer holding period and potentially an enforcement process.
Therefore, term and liquidity should be considered together.
Private Mortgage Investment vs. Other Investment Options
Private mortgages should not be evaluated in isolation.
Investors may compare them with options such as:
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GICs
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bonds
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publicly traded REITs
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dividend-paying investments
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rental properties
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mortgage investment corporations
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other private lending opportunities
The comparison should include more than the advertised return.
| Investment | Potential Income | Liquidity | Real Estate Exposure | Main Consideration |
|---|---|---|---|---|
| GIC | Generally lower | Generally high at maturity | None | Lower risk, limited upside |
| Bonds | Varies | Often more liquid | Usually indirect/none | Interest-rate and market risk |
| Public REIT | Varies | Generally high | Indirect | Market volatility |
| Rental Property | Rent + appreciation potential | Low | Direct | Management, expenses and property risk |
| Private Mortgage | Contractual interest | Generally low | Secured lending exposure | Borrower, property and enforcement risk |
| MIC | Distribution/income potential | Usually lower than public investments | Mortgage portfolio | Portfolio, management and liquidity risk |
These are broad comparisons only. Individual investments can vary substantially.
A private mortgage should not be described as simply a “higher-return GIC.” It has a fundamentally different risk profile.
FSRA notes that mortgage investments are not guaranteed and that investors may lose some or all of their principal.
Direct Private Mortgage vs. Mortgage Investment Corporation
Investors may encounter two very different approaches.
Direct Private Mortgage
With a direct mortgage investment, an investor provides capital to a particular mortgage.
The investor can examine the specific:
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borrower
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property
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mortgage amount
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LTV
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mortgage position
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term
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interest rate
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repayment strategy
The benefit is greater visibility into the individual loan.
The drawback is concentration.
If $100,000 is invested in one mortgage and that mortgage experiences serious problems, the investor has significant exposure to that one transaction.
Mortgage Investment Corporation
A Mortgage Investment Corporation, commonly called a MIC, pools capital from investors and invests in mortgages.
Instead of selecting one individual mortgage, an investor purchases an interest in the MIC.
The potential advantage is diversification across multiple mortgages.
However, the investor is now relying on the MIC’s:
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investment strategy
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underwriting
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management
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portfolio construction
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administration
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reporting
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liquidity provisions
A MIC investment therefore requires its own due diligence.
Investors should review the offering documents and understand exactly what they are purchasing.
FSRA has highlighted investor-protection concerns around mortgage investment administration, including monitoring, reporting, conflicts of interest and handling of mortgage investment funds.
Can Private Mortgages Be Held in an RRSP or TFSA?
Certain mortgage investments can be held through registered investment structures, but investors should not assume that every private mortgage automatically qualifies.
A self-directed RRSP can provide access to a broader range of investments than a standard RRSP, subject to the applicable rules and the plan administrator’s requirements.
The Canada Revenue Agency confirms that self-directed RRSPs allow investors to control investment decisions and that the financial institution or trustee handles the administration of the plan.
For a mortgage investment, the structure and documentation need to be set up properly.
Before proceeding, confirm:
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whether the mortgage is an eligible investment
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whether the trustee will accept it
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how the mortgage will be registered
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what administrative fees apply
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how interest payments will be handled
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what happens if the mortgage defaults
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what tax rules apply to the particular structure
Do not rely on claims that an investment is “tax-free” simply because it involves a registered account. CRA specifically warns Canadians about questionable self-directed RRSP arrangements involving mortgages and other private investments.
A qualified tax professional and the registered-account provider should confirm the appropriate treatment.
What Happens If a Private Mortgage Borrower Defaults?
This is one of the most important questions an investor should ask before investing.
A mortgage investment is not risk-free simply because real estate is used as security.
If the borrower stops making payments, several things can happen.
Depending on the circumstances and mortgage structure:
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The borrower may cure the default.
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The mortgage may be extended or modified.
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The borrower may refinance.
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The property may be sold.
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Enforcement proceedings may become necessary.
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Legal and administrative costs may arise.
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The property may sell for less than expected.
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The investor may recover less than the amount originally invested.
The presence of a mortgage charge does not guarantee that the investor will recover 100% of the principal.
FSRA explicitly identifies borrower default, low liquidity and fraud as risks associated with private mortgage investments and warns that investors can lose some or all of their principal.
Why Property Equity Is Not the Same as Guaranteed Protection
It is common to hear:
“The mortgage is secured by the property, so the investment is safe.”
That is too simplistic.
Suppose:
Property value: $700,000
Mortgage investment: $400,000
On paper, there appears to be $300,000 of equity.
But an enforcement scenario can involve:
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legal costs
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property maintenance
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unpaid taxes
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interest arrears
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selling costs
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delays
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declining property values
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other registered claims
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priority issues
The amount ultimately recovered depends on the specific circumstances.
That is why LTV is a risk-management factor—not a guarantee of repayment.
Private Mortgage Investment Due-Diligence Checklist
Before investing, an investor should be able to answer the following questions.
1. What is the property’s current value?
Review the valuation and understand how it was established.
2. What is the LTV?
Calculate the total debt secured against the property—not simply the mortgage being offered.
3. What mortgage position am I in?
First position and subsequent positions carry different risk characteristics.
4. What debts are registered ahead of me?
Review the title and applicable registrations.
5. Who is the borrower?
Understand the borrower’s circumstances and reason for seeking private financing.
6. How will the borrower repay the mortgage?
The exit strategy should be specific rather than simply “refinance later.”
7. What happens if the exit fails?
Ask what the contingency plan is.
8. How is interest paid?
Determine whether payments are monthly, accrued, prepaid or structured another way.
9. What fees apply?
Understand all investor, brokerage, administration and legal costs that may affect the return.
10. Who administers the mortgage?
Know who is responsible for collecting payments, monitoring the mortgage and communicating with investors.
11. Are there conflicts of interest?
Ask whether the brokerage, administrator or related company has another relationship with the borrower or investment.
12. What documents will I receive?
Review the mortgage commitment, legal documents, disclosure documents and any applicable offering documents.
13. How liquid is the investment?
Know whether you can exit before maturity and under what conditions.
14. What happens if the borrower defaults?
Understand the enforcement process and who is responsible for managing it.
15. Is the expected return realistic?
Do not judge the investment solely by the highest advertised rate.
FSRA’s recent supervision work specifically identifies inadequate monitoring, incomplete administration agreements, mishandling of mortgage investments and insufficient disclosure of conflicts as investor-protection concerns.
Red Flags Investors Should Watch For
A private mortgage investment deserves additional scrutiny if the opportunity involves:
Guaranteed high returns
Be cautious when an investment is presented as having a high return with little or no risk.
FSRA has specifically warned mortgage professionals against misleading or overly optimistic investment advertising.
Pressure to invest quickly
A legitimate investment opportunity should allow sufficient time to review the documents and understand the risks.
Little information about the property
If the investment is secured by real estate but meaningful information about the property is unavailable, that should raise questions.
An unclear exit strategy
“Someone will refinance it” is not the same as a documented and realistic repayment plan.
An unusually high LTV
High leverage leaves less room for property-value changes, enforcement costs and other unexpected expenses.
No independent legal review
Investors should understand the legal structure and consider obtaining independent legal advice.
Unclear fees
If it is difficult to determine who receives the fees and what expenses reduce the investor’s return, ask for clarification before proceeding.
Related-party relationships that are not clearly disclosed
Investors should understand whether the parties arranging or administering the mortgage have other interests connected to the transaction.
How to Decide Whether a Private Mortgage Return Is Attractive
A good investment decision starts with the entire transaction—not the interest rate.
Consider the following five questions.
Question 1: What am I earning?
Look at the actual expected income.
Question 2: What am I risking?
Consider borrower, property, LTV, mortgage position, liquidity and enforcement risk.
Question 3: What protects my capital?
Understand the security, priority and available equity.
Question 4: How do I get my money back?
Understand the borrower’s exit strategy.
Question 5: What could cause the expected return to change?
Look for the weak points.
This approach is more useful than comparing two investments simply because one offers a higher rate.
For example:
8% with strong security and conservative leverage
may be more appropriate for a particular investor than:
14% with high leverage and a weak exit strategy.
The higher number does not automatically make the second investment better.
Are Private Mortgage Investments Safe?
Private mortgage investments should not be described as risk-free or guaranteed.
The real estate security can provide an important layer of protection, but it does not eliminate investment risk.
Potential risks include:
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borrower default
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property-value decline
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high LTV
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lower mortgage priority
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construction delays
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refinancing risk
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enforcement costs
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fraud
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title issues
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liquidity constraints
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administrator or servicing issues
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economic conditions
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interest-rate changes
FSRA’s reporting specifically notes that private mortgage investments can have low liquidity and that investors may lose some or all of their principal.
The appropriate question is therefore not:
“Is this investment safe?”
A better question is:
“Do I understand the risks, and am I comfortable with them relative to the expected return?”
How Taxes Can Affect Your Actual Return
The interest earned from an investment can have tax consequences.
The tax treatment depends on factors such as:
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whether the investment is held personally
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whether it is held through a registered account
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the nature of the income
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the investor’s circumstances
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the structure of the investment
This is another reason why two investors can receive the same gross return but have different after-tax outcomes.
For example, consider a hypothetical $50,000 investment producing an 8% return:
$50,000 × 8% = $4,000
The $4,000 is the gross investment income in this simplified example.
The amount an investor ultimately keeps depends on the applicable tax treatment and investment structure.
Because tax rules can change and individual circumstances differ, investors should confirm their situation with a qualified Canadian tax professional.
Private Mortgage Investment Returns: A Practical Way to Think About Risk and Reward
There is no magic interest rate that automatically makes a mortgage investment attractive.
Instead, think about the investment as a package:
Return
Security
LTV
Borrower quality
Property quality
Mortgage position
Exit strategy
Liquidity
Fees
Legal structure
=
The actual investment opportunity
If one of these areas is weak, the advertised interest rate deserves less attention.
A strong investment process is about understanding why the borrower is paying that rate and what could happen if the original plan does not work.
Frequently Asked Questions
What is a private mortgage investment?
A private mortgage investment involves providing mortgage capital to a borrower in exchange for interest, with real estate typically serving as security for the loan.
How do private mortgage investors make money?
Investors generally earn income from interest paid by borrowers. Depending on the structure, other lender fees or charges may also contribute to income. Expenses, losses and other deductions can reduce the amount ultimately received.
What is a good return on a private mortgage investment?
There is no universal “good” return. A higher rate generally reflects greater risk, and the appropriate return depends on factors such as LTV, property, borrower, mortgage position, term and exit strategy.
Are private mortgage investments guaranteed?
No. Private mortgage investments are not guaranteed. Investors can potentially lose some or all of their principal.
Does a lower LTV make a private mortgage safer?
A lower LTV can provide a larger equity cushion, but it does not eliminate risk. Property value, mortgage priority, borrower circumstances, legal costs and other factors still matter.
What is the difference between a private mortgage and a MIC?
A direct private mortgage generally involves investing in a particular mortgage, while a MIC pools investor capital and invests across a portfolio of mortgages. The risks, liquidity and legal structure can differ between the two.
Can private mortgages be held in an RRSP?
Certain mortgage investments can qualify for self-directed registered plans, subject to applicable rules and the requirements of the plan trustee. Investors should confirm eligibility before proceeding.
How long does a private mortgage investment last?
Terms vary. Many private mortgage arrangements are relatively short-term, but the actual term depends on the mortgage agreement and the borrower’s repayment strategy.
What happens if the borrower cannot repay?
The mortgage may be renewed, refinanced, sold or enforced depending on the circumstances and legal structure. Enforcement can involve costs and delays, and recovery is not guaranteed.
Is private mortgage investing better than a GIC?
Not necessarily. A private mortgage and a GIC have different risk, liquidity and return characteristics. A GIC may offer lower potential income but generally provides a different level of principal protection. Investors should compare the entire risk-return profile rather than focusing only on yield.
Final Thoughts: Look Beyond the Rate
Private mortgage investing can provide an opportunity to earn income from real estate-backed lending without directly owning and managing a property.
But the investment should never be judged by the interest rate alone.
A mortgage paying a higher rate may involve higher leverage, a weaker borrower profile, a more complicated property or a less certain exit strategy. Conversely, a lower-rate mortgage with stronger security and a conservative structure may offer a different risk profile.
The most important part of private mortgage investing is understanding the complete transaction.
Before committing capital, ask:
What am I earning?
What am I risking?
What secures my investment?
How will the borrower repay the mortgage?
What happens if that plan fails?
Those questions can provide far more insight than a headline return.
Private mortgage investments are not suitable for every investor. Anyone considering an investment should review the specific documents, understand the risks and obtain independent legal, tax and investment advice where appropriate.
About the Author
Faizal Garasia is a licensed mortgage broker (FSRA Lic. #10557) with over 15+ of experience arranging private, alternative, and traditional mortgage financing across Ontario.He specializes in helping homeowners in arrears, self-employed borrowers, and clients facing power of sale compare their financing options side by side.