When homeowners compare private mortgages and bank mortgages, interest rates often get the most attention. However, interest rate alone does not reflect the true cost of borrowing.
A full cost comparison must include:
- Interest paid over time
- Fees charged upfront
- Loan duration
- Renewal or extension costs
Understanding the total cost helps homeowners decide which option fits their situation.
Typical Bank Mortgage Costs in Canada
Bank mortgages are designed for long-term financing and generally offer lower interest rates.
Bank Mortgage Interest Rates
Typical bank mortgage rates often range from:
- 5% to 7%, depending on market conditions and borrower profile
Bank Mortgage Fees
Bank mortgages usually involve fewer fees, which may include:
- Appraisal fees
- Legal fees
Many banks waive lender or broker fees, reducing upfront cost.
Typical Private Mortgage Costs in Canada
Private mortgages are short-term loans priced based on risk.
Private Mortgage Interest Rates
Private mortgage rates commonly range from:
- 8% to 14%, and higher in higher-risk cases
These rates are usually interest-only.
Private Mortgage Fees
Private mortgages often include:
- Lender fees (1%–4%)
- Broker fees (1%–3%)
- Legal and appraisal costs
These fees increase the total cost beyond interest.
Example Cost Comparison: Bank vs Private Mortgage
Scenario
- Loan amount: $400,000
- Term: 12 months
Bank Mortgage Example
- Interest rate: 6%
- Monthly payment (interest portion): ~$2,000
- Annual interest: ~$24,000
- Fees: ~$2,000
Estimated total cost: ~$26,000
Private Mortgage Example
- Interest rate: 12%
- Monthly interest-only payment: ~$4,000
- Annual interest: ~$48,000
- Fees (lender, broker, legal, appraisal): ~$15,000
Estimated total cost: ~$63,000
This example highlights the cost difference between private and bank financing.
Why Private Mortgages Cost More
Private mortgages cost more because:
- Lenders take on higher risk
- Loans are short-term
- Approval is faster and more flexible
- Credit and income standards are relaxed
The higher cost reflects speed, flexibility, and access when banks cannot lend.
Short-Term vs Long-Term Cost Perspective
Private mortgages are intended for short-term use.
When used for:
- 6–12 months
- With a clear exit strategy
The higher cost may be acceptable if it solves a temporary problem.
However, long-term reliance on private mortgages can result in significantly higher total borrowing costs.
When a Bank Mortgage Is Usually the Better Option
A bank mortgage is typically more cost-effective when:
- You qualify based on credit and income
- Timing is flexible
- Long-term financing is needed
Banks remain the lowest-cost option for eligible borrowers.
When a Private Mortgage May Be Worth the Cost
Despite higher costs, private mortgages may be worth considering when:
- Bank financing is unavailable
- Funds are needed urgently
- The situation is temporary
- There is a clear plan to refinance or sell
In these cases, access to financing may outweigh higher costs.
Hidden Costs to Watch For
Homeowners comparing options should watch for:
- Renewal fees on private mortgages
- Higher rates at extension
- Compounded fees over time
Asking for a full cost breakdown upfront is critical.
Questions to Ask When Comparing Costs
Before choosing a mortgage option, ask:
- What is the total cost over the full term?
- What fees apply upfront and at renewal?
- How long will the loan realistically be needed?
- What are the exit options?
Clear comparisons reduce financial surprises.
Final Thoughts
Private mortgages are almost always more expensive than bank mortgages when comparing total cost. However, cost alone does not determine suitability.
The right choice depends on eligibility, timing, and whether the financing need is temporary or long-term.
Note: Rates and costs vary based on your credit profile, available equity, and location.