The client
A homeowner in Windsor is exiting a $60,000 private lender second, alongside an existing $310,000 first mortgage. The property advanced at a $480,000 value two years ago and now appraises at $560,000.
Private second principal
$60,000
Advanced 2 years ago
Property value at advance
$480,000
When the private note funded
Current appraised value
$560,000
At exit
Existing first mortgage
$310,000
Unaffected by the private note
The problem
The borrower had assumed the private second's exit cost would resemble a flat few-thousand-dollar fee, similar to what a friend had paid on an unrelated deal. The actual note carried a shared-appreciation clause instead -- a contractual 15% share of the property's own appreciation since the loan advanced, payable at exit against a fresh appraisal, not a flat dollar amount or a spread on the interest rate.
Why a flat-fee assumption badly underestimated the cost
- ▸The property gained $80,000 in appraised value over the two years the private note was outstanding
- ▸15% of that gain is $12,000 -- on top of, not instead of, the $60,000 principal itself
- ▸A flat fee comparable to an unrelated deal has nothing to do with how THIS note's own clause was written
As how private lenders actually assess equity makes clear, private fee structures are set deal by deal -- a shared-appreciation clause is one of several ways a lender can be compensated, and it produces a materially different exit cost than a flat fee on the same principal.
The numbers
The exit refinance had to size to the appreciation-adjusted payout, not the $60,000 principal the borrower had been picturing.
| Sizing the exit payout and the consolidated refinance | Amount |
|---|---|
| Appreciation since advance ($560,000 - $480,000) | $80,000 |
| Shared-appreciation fee (15% of appreciation) | $12,000 |
| Private second principal | $60,000 |
| Total exit payout | $72,000 |
| Existing first mortgage | $310,000 |
| New consolidated refinance | $382,000 |
| Qualifying the consolidated refinance | Figure |
|---|---|
| Minimum qualifying rate on a 5.10% contract rate | 7.10% |
| Payment at the qualifying rate, 25 years | $2,699/mo |
| TDS (payment + $350 tax + $150 heat + $280 car loan) ÷ $9,100 income | 38.2% |
Because this is an uninsured refinance, CMHC's ratio maximums don't apply directly -- the 38.2% figure is informational, showing the file comfortably absorbs the appreciation-adjusted payout rather than the flat fee the borrower had originally budgeted for.
The solution
A mortgage broker read the shared-appreciation clause in the original private commitment letter line by line before quoting any exit number.
First, located the exact clause governing the fee. The note specified 15% of the property's appreciation since advance, calculated against a fresh appraisal at the time of exit -- not a flat fee, and not tied to the interest rate at all.
Second, ordered the fresh appraisal the clause itself required. The clause's own wording made an appraisal a precondition to calculating the fee, not an optional step.
Third, sized the exit refinance to the full $72,000 payout from the first conversation. Quoting the borrower a number based on the $60,000 principal alone would have left a $12,000 shortfall discovered mid-closing.
The outcome
A consolidated refinance of $382,000 funded at 5.10%, retiring the private note's full appreciation-adjusted payout and the existing first mortgage together. Total debt service settled at 38.2% -- informational only, since this uninsured refinance carries no CMHC ratio ceiling.
The 15% shared-appreciation percentage is this private lender's own deal structure; other private lenders price the same risk through a flat fee or a higher rate instead, which would have produced a different exit cost entirely.
What to take from this file
- 01A shared-appreciation clause is not a flat fee. Its cost scales with how much the property gained, not with the loan amount or a fixed dollar figure.
- 02Read the actual clause before quoting an exit cost from memory of a different deal. Private fee structures are set deal by deal, and no two notes are guaranteed to match.
- 03A fresh appraisal is often a precondition of the calculation itself, not an optional add-on. Skipping it leaves the fee unresolved, not smaller.
- 04Size the exit refinance to the full contractual payout, not the original principal alone. A shortfall discovered mid-closing is a much harder problem than one priced from the start.
- 05Ask explicitly how a private note's fee is calculated at origination, not just what rate it carries. A shared-appreciation clause can cost far more than a flat fee on a property that gains significant value.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸5.10% rate — rates move daily; not a quote.
- ▸the 15% shared-appreciation percentage — private lender fee structures are set deal by deal; this percentage is illustrative, not a schedule.
- ▸the total debt service figure — this file is an uninsured refinance, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.