As high inflation, rising interest rates and a slowing economy weighs on consumers looking to jump into the real estate market, more Ontario residents are likely to enter private mortgages instead of a traditional loan, according to the Financial Services Regulatory Authority of Ontario (FSRA).

In a poll released Monday, the FSRA said 10.6 per cent of mortgages brokered in 2021 were private (35,568). The organization said it thinks the number increased in 2022 and the trend will continue in 2023.

"With rising interest rates, high inflation, and a slowing economy, more consumers are struggling to qualify for a traditional loan,” Huston Loke, executive vice-president of market conduct at FSRA, said in the press release.

“It's critical that homeowners who enter into private mortgages fully appreciate how their loan works, the pros and cons of the arrangement, and the true cost of a private mortgage."

KNOWLEDGE GAP

While there’s a growing number of Ontarians opting for private mortgages, the poll found there’s a significant knowledge gap among homeowners when it comes to private versus traditional loans.

It said more than half of owners (54 per cent) think payments for a private mortgage will go to interest and the principal payment, “when in reality, many private mortgage payments go towards servicing the interest only.”

It found the top reasons why respondents are using a private lender are more flexible terms (26 per cent), an easier application process (13 per cent) and the idea that they’re better for Canadians who don’t have a steady income stream (12 per cent).

But Ontario residents don’t want to pay more for a private mortgage, with about 66 per cent of individuals saying they wouldn’t dish out more cash for lender fees or broker commissions, according to the report.

"Mortgages from private lenders often come with different terms and conditions than traditional bank mortgages. Higher lender fees, interest-only conditions and shorter terms are just some of the things you may need to navigate," Loke said.

"Private mortgages can be an option for some consumers, such as those who are unable to qualify for a traditional mortgage. But remember, for many people private mortgages should be a short-term stop gap, not a long-term solution."

Methodology

“The online survey of 1,028 Ontarians  aged 18+ was conducted in Ontario between November 11th and November 27th, 2022. Using 2021 Census data from Statistics Canada, the sample has been weighted by age and gender to be representative of the Ontario population using a raked weighting methodology. Because the survey was conducted online, the sample cannot be assumed to be truly random. A random sample of this size would have a margin of error of +/− 3.1%, 19 times out of 20.”