Hard Money and Private Loans: How They Work and What They Cost
How private and hard-money real estate loans are underwritten, what they really cost, the rules that apply in Nova Scotia and California, and what to check.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A hard money loan is a short-term mortgage from a private lender, secured mainly by the value of the property rather than by the borrower’s income or credit history. The lender may be an individual, a mortgage investment company or a private fund. In Canada the same thing is usually called a private mortgage; in the U.S., “hard money” and “private money” are used for much the same product.
Owners and buyers use these loans when a bank will not lend quickly enough or at all: a building that is vacant or half-renovated, a borrower with a credit problem, a purchase that has to close in days, or a property in distress. This article explains how private lenders decide, what the loans cost and the rules that apply in Nova Scotia and California, where UBU Financial works.
How a private lender decides
A bank lends against your ability to repay: your income, the building’s net operating income, your credit record and the debt-service ratios its rules require. A private lender looks mostly at two things: what the property is worth today, and how you will repay the loan when it comes due. That is why it can say yes to a property with no income yet.
Bank mortgage versus private or hard-money loan
Bank or institutional lender
- Underwrites the borrower’s income, the property’s cash flow and credit history.
- Usually needs a stable, operating property.
- Approval can take weeks and follows fixed policy.
- Longer terms and amortization; lower rate and fees.
Private or hard-money lender
- Underwrites the property’s current value and the exit plan.
- Will lend on vacant, under-renovation or distressed property.
- Can decide and fund quickly; terms are negotiated deal by deal.
- Short terms, often interest-only, with a higher rate and upfront fees.
The exit is the core of the deal. A private loan is normally repaid in one of two ways: by refinancing with a bank once the property is stabilized, or by selling it. If neither is realistic by the maturity date, the loan is likely to end in an expensive extension or in enforcement.
What it costs
The interest rate is only part of the price. Private loans usually carry an upfront lender fee, and often a broker fee, legal fees for both sides, an appraisal and sometimes an exit or extension fee. Because the term is short, these upfront costs weigh heavily on the effective annual cost.
| Item | Example assumption | Cost |
|---|---|---|
| Loan amount | $1,000,000, interest-only, 12 months | |
| Interest | 11% a year | $110,000 |
| Lender fee | 2% of the loan, paid at closing | $20,000 |
| Broker fee | 1% of the loan | $10,000 |
| Legal and appraisal | Lump sum | $8,000 |
| Total cost for the year | $148,000 (about 14.8% of the loan) |
If the same loan is repaid after six months, most of the fees are already spent, so the annualized cost is higher still. Compare offers on the total dollars you will pay over the time you expect to need the money, not on the headline rate.
Rules in Nova Scotia and the rest of Canada
Licensing. Nova Scotia’s Mortgage Regulation Act requires every mortgage lender, mortgage brokerage, mortgage broker, associate mortgage broker and mortgage administrator carrying on business in the province to hold a licence, unless exempted.[1] A “mortgage lender” under the Act is anyone who, as a business or in the course of business, extends credit secured by real property.[1] The Registrar of Mortgage Regulation keeps a public register of licensees, and the licensing regulations set out what each class of licence requires.[1][2]
The criminal interest rate. The Criminal Code sets a criminal rate of 35% a year, calculated as an annual percentage rate. It defines interest broadly, as the total of all charges and expenses paid for advancing credit, including fees and commissions, so lender fees count.[3] Commercial loans get different treatment when the borrower is not an individual and the money is for a business purpose: loans of more than $10,000 and up to $500,000 are exempt from the 35% rate as long as the APR does not exceed 48%, and loans of more than $500,000 are not subject to any cap under the regulations.[4] Borrowing personally rather than through a company can therefore change the rules that apply.
No penalty rate on arrears. The federal Interest Act prohibits any fine, penalty or higher rate of interest on arrears of principal or interest secured by a mortgage on real property, if it increases the charge on the arrears beyond the rate payable on money that is not in arrears.[5] Watch for “default rate” clauses in private mortgage commitments and ask a lawyer whether they are enforceable.
Rules in California
In California, the California Financing Law requires the licensing of finance lenders and brokers who make and broker consumer and commercial loans, with specified exceptions. Licence applications go through the Nationwide Multistate Licensing System (NMLS), and the Department of Financial Protection and Innovation (DFPI) administers the law.[6] Some lenders and brokers operate under a different licence or an exemption, so ask any lender or broker which licence it holds and check it before you sign.
What to check before you sign
Check the licence
In Nova Scotia, look up the lender or broker on the Registrar’s public register. In California, check the DFPI or NMLS licence.
Get every cost in writing
Interest, lender and broker fees, legal, appraisal, renewal, extension, exit and discharge fees. Work out the total for the term you expect to need.
Read the default and renewal clauses
What happens if you are a day late, what an extension costs, and whether the lender can call the loan early.
Know what is pledged
Is the loan secured only on the property, or also by a personal guarantee or a charge on other property? See our article on borrowing against what you own.
Line up the exit
Get an indication from a bank or other long-term lender of what it would need to refinance, and set your timetable from that.
Use your own lawyer
Have a real estate lawyer review the commitment letter and mortgage before you sign it.
Private loans are one of several options when a bank says no; others include bridge loans, seller financing and equity partners. Our overview of financing hard-to-finance property compares them, and borrowing against other assets is covered in using home equity, credit lines and cross-collateralization.
This article is general information, not legal advice. Speak to a lawyer in your province or state before borrowing.
Sources
- Mortgage Regulation Act, S.N.S. 2012, c. 11 — Nova Scotia House of Assembly, Office of the Legislative Counsel, Consolidated to November 1, 2021. Checked 2026-10-12.
- Mortgage Lender, Brokerage, Broker and Administrator Licensing Regulations (N.S. Reg. 121/2020) — Province of Nova Scotia. Checked 2026-10-12.
- Criminal Code, section 347: Criminal interest rate — Justice Laws Website, Government of Canada. Checked 2026-10-12.
- Criminal Interest Rate Regulations: SOR/2024-114 — Canada Gazette, Part II, June 19, 2024. Checked 2026-10-12.
- Interest Act (R.S.C., 1985, c. I-15), section 8 — Justice Laws Website, Government of Canada. Checked 2026-10-12.
- Consumer & Commercial Loans (California Financing Law) — California Department of Financial Protection and Innovation. Checked 2026-10-12.
