Private Mortgage Loans: Think About the End, Right from the Start!

  • Apr. 30, 2025
  • Private loan
  • Written by: Ulric Caron

An Essential Strategy: The Exit Scenario

In the field of private real estate lending, the concept of an "exit strategy" (or exit scenario) is crucial for both borrowers and lenders. It is a pre-established plan that defines exactly how the borrower will repay the loan and how the lender will recover their investment.

The hallmark of a solid financial partner is the ability to develop a viable exit strategy and discuss it with the private lender from the very beginning of the financing application.

The clearer and more achievable the exit plan, the higher the chances of the file receiving a favorable response. Since a private mortgage is a short-term solution, the exit strategy is of paramount importance.

  1. What is an Exit Strategy?

    In simple terms, an exit strategy is a plan that anticipates the end of the loan. It describes the various options available to repay the debt and the conditions under which they will be implemented.

  2. Common Examples of Exit Strategies:
    • Refinancing with a Traditional Financial Institution: The borrower obtains a new loan from a bank to pay off the private loan. This is often used when the borrower has improved their financial situation or when the property value has increased. In debt consolidation cases, this is often possible after one (1) year, which also allows time to boost the borrower's credit score.
    • CMHC Exit: Similarly, it is common to acquire and optimize a building through a private mortgage lender and then refinance using CMHC (Canada Mortgage and Housing Corporation) programs. It is the borrower’s responsibility to verify that this exit plan is viable based on current criteria.
    • Sale of the Property: The borrower sells the property to repay the loan. This may be an option if the borrower performs renovations that increase the property's value. It is also a frequent strategy to recover available equity in a property following a notice of "taking in payment" from a traditional institution.
    • Repayment through Other Funding Sources: The borrower uses funds from other sources, such as an inheritance or an investment, to pay off the loan.

    And, unfortunately, in cases of payment default:

    • Lender Taking Possession of the Property: If the borrower defaults, the lender may take possession of the real estate to recover their investment.

    Repossession is never desired nor desirable. In fact, this is where the exit strategy becomes vital for both parties: it ensures the feasibility of the real estate project and the ultimate repayment of the loan.

  3. Why is an Exit Strategy So Important?

    For the Borrower:

    • Financial Planning: A clear exit strategy allows the borrower to plan their finances and ensure they will be able to repay the loan.
    • Stress Reduction: Knowing exactly how the loan will be settled reduces the uncertainty and stress associated with borrowing.
    • Negotiation: A well-defined exit strategy can facilitate the negotiation of loan terms with the lender.

    For the Lender:

    • Investment Security: A solid exit strategy minimizes risk and maximizes the chances of recovering the investment. A reputable private lender should not rely solely on the guarantee of repossessing the property; on the contrary, that option should never be the primary goal.
    • Trust: A clear plan establishes trust between the lender and the borrower.
    • Professionalism: It demonstrates a structured approach, showing that the lender truly wants the borrower to succeed in their objective.
  4. Key Elements of a Good Exit Strategy:
    • Clarity: The plan must be clear and easy for both parties to understand.
    • Realism: The scenario must be based on realistic and achievable assumptions.
    • Flexibility: It should be flexible enough to adapt to changing circumstances.
    • Documentation: The plan should be documented in writing within the loan agreement.
  5. Conclusion

    The exit strategy is an essential component of private real estate lending. It provides security and clarity to both borrowers and lenders, fostering healthy and transparent financial relationships. By defining a clear plan from the start, both parties can approach the loan with confidence and minimize risk.

    Take the next step

    Want to learn more? Contact us directly at info@lynxbleu.ca to discuss your situation with our experts. We have helped hundreds of Quebecers realize their real estate projects for over 10 years.

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