When arranging a private mortgage, getting the deal funded is only part of the job. Just as important is understanding how the borrower plans to repay the mortgage at the end of the term.
For mortgage brokers working with private lenders, a strong mortgage exit strategy can be one of the most important factors in determining whether a deal is fundable.
Private mortgages are generally intended to provide short-term financing while a borrower works toward a specific outcome. That may include improving credit, completing renovations, selling a property, refinancing with a traditional lender, resolving tax arrears or stabilizing income.
The stronger and more realistic the exit strategy, the easier it is for a private lender to understand the risk behind the mortgage.
Here are some important exit strategy tips mortgage brokers should consider when submitting deals to private lenders.
1. Start With the Exit Strategy, Not Just the Funding Need
A private mortgage submission should answer two basic questions: Why does the borrower need the money today, and how will the mortgage be repaid later?
It’s easy to focus on the immediate problem. Perhaps the borrower needs to consolidate debt, stop a power of sale, complete construction or close a purchase quickly.
But private lenders also need to understand what changes during the mortgage term that makes repayment possible.
For example, saying a borrower will “refinance in 12 months” is not necessarily an exit strategy on its own. A stronger explanation might be:
“The borrower is consolidating high-interest unsecured debt, reducing monthly obligations by approximately $2,000 and plans to rebuild their credit over the next 12 months before refinancing with an institutional lender.”
The second explanation provides a clear path between today’s problem and tomorrow’s solution.
2. Make Sure the Exit Strategy Matches the Term
Private mortgage terms are often relatively short, commonly ranging from six months to two years.
The proposed exit strategy must therefore be achievable within the mortgage term.
If the borrower needs two years to repair severely damaged credit, a six-month private mortgage may not provide enough time.
Similarly, if a borrower plans to complete a major renovation before refinancing, the broker should consider:
- Construction timelines
- Permit requirements
- Contractor availability
- Expected completion dates
- Potential delays
- The anticipated value once construction is complete
A realistic timeline is usually more valuable than an overly optimistic one.
Private lenders understand that unexpected events happen. What they want to see is that the proposed plan makes sense from the beginning.
3. Support the Exit Strategy With Evidence
A good exit strategy becomes stronger when it can be supported with documentation.
Depending on the situation, this could include employment documentation, renovation budgets, building permits, contractor estimates, current credit reports, property listings, purchase agreements or evidence that debts are being paid out.
For example, if the exit strategy is the sale of the property, consider providing information about:
- Current market value
- Expected listing price
- Comparable sales
- Realtor involvement
- Estimated selling costs
- Total mortgage indebtedness
- Expected net proceeds after closing
If the exit strategy depends on refinancing, determine what needs to change before the borrower is likely to qualify.
The more measurable the plan, the stronger the private mortgage submission becomes.
4. Work Backward From the Future Refinance
One of the most common private mortgage exit strategies is refinancing into conventional financing.
Mortgage brokers can strengthen these files by working backward.
Ask yourself: If I were submitting this borrower to an institutional lender 12 months from now, what would need to be different?
Perhaps the borrower needs to:
- Improve their credit score
- Establish two years of business income
- Reduce revolving debt
- Complete renovations
- Increase property value
- File outstanding income taxes
- Resolve collections
- Stabilize employment
Once those requirements are identified, the private mortgage can be structured around helping the borrower reach them.
This makes the exit strategy more than an assumption. It becomes an actionable plan.
5. Consider the Future Loan-to-Value
Equity is often an important component of private mortgage lending, but brokers should also consider what the loan-to-value ratio may look like when the borrower exits.
Suppose a property is worth $700,000 and the total mortgage financing is $420,000.
That represents a 60% LTV.
If the borrower plans to refinance one year later, the mortgage broker should estimate what the balance will be at that time, including any accumulated interest or other financing obligations.
The broker can then determine whether the anticipated future LTV is likely to fit the guidelines of the lender expected to complete the refinance.
A refinance strategy that requires an 85% LTV from a lender whose maximum is 80% has a problem before the mortgage even begins.
6. Have a Secondary Exit Strategy
The strongest private mortgage deals often have more than one reasonable way out.
The primary exit may be refinancing. The secondary exit may be selling the property.
For example, a borrower completing an additional dwelling unit may intend to refinance once construction is complete and the property’s value has increased.
But if the refinance cannot be completed, the property could potentially be sold to repay the mortgage.
Having a secondary strategy does not mean the broker expects the primary plan to fail. It simply demonstrates that multiple repayment possibilities have been considered.
7. Be Careful With Exit Strategies Based Entirely on Appreciation
Property values may increase over time, but appreciation alone is usually not a strong short-term exit strategy.
Statements such as “The property should be worth more next year” are difficult to rely on.
A better exit strategy focuses on something the borrower can influence.
For example:
“The borrower is completing a permitted renovation expected to increase the usable living area of the property, after which the mortgage will be refinanced based on the completed value.”
The difference is important.
One strategy depends mainly on the market. The other depends on a defined event.
8. Understand What Could Cause the Exit to Fail
Mortgage brokers should stress-test the proposed strategy before submitting the deal.
Ask questions such as:
- What happens if the property does not sell within six months?
- What happens if construction runs three months behind schedule?
- What happens if the borrower’s credit improves but not enough for an institutional refinance?
- What happens if interest rates increase?
- What happens if the projected property value comes in lower than expected?
Thinking through these scenarios can help identify weaknesses before the private lender does.
It can also help determine whether the mortgage should have a longer term, lower LTV or additional contingency built into the structure.
9. Keep the Exit Strategy Simple
Some of the strongest private mortgage opportunities have relatively straightforward exit strategies.
A borrower may need twelve months to improve credit.
A property may already be listed for sale.
A construction project may simply need to be completed before refinancing.
A business owner may need another year of documented income before qualifying conventionally.
The exit strategy does not need to be complicated. It needs to be credible.
Mortgage brokers should be able to explain the repayment strategy in a few clear sentences.
If the strategy requires several unlikely events to occur perfectly, the deal may deserve another look.
Why Exit Strategies Matter to Private Lenders
Private lenders are not simply evaluating whether there is enough equity in the property today.
They are also evaluating what happens during the mortgage term.
A well-structured private mortgage should give the borrower enough time and flexibility to solve the issue that prevented them from obtaining traditional financing in the first place.
For the lender, that means reviewing the property, borrower circumstances, mortgage structure and repayment strategy together.
For the broker, presenting a realistic exit strategy can make the difference between a difficult submission and one that a private lender can properly evaluate.
The Bottom Line
A private mortgage should be viewed as a bridge from the borrower’s current situation to a better financial position.
The clearer that bridge is, the stronger the mortgage submission becomes.
Before sending a private mortgage deal to a lender, ask yourself three questions:
What needs to happen during the term?
Is there enough time for it to happen?
What happens if the original plan does not work?
At Erie Shores Capital, we look beyond the immediate financing request to understand the complete strategy behind each mortgage opportunity. That includes the property’s equity, borrower circumstances, loan structure and, most importantly, the proposed path to repayment.
If you are a mortgage broker working on a private mortgage in Ontario, contact Erie Shores Capital to discuss the deal, the property and the proposed exit strategy.