Alternative Mortgage Lenders in Canada
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Alternative mortgage lenders provide financing solutions for borrowers who may not meet the strict qualifying requirements of prime lenders. These lenders offer greater flexibility, making them a practical option for individuals lacking employment history, debt, or lower credit scores. These lenders can also be a viable alternative for those who are self-employed or have non-traditional income.
Key Takeaways
- Alternative lenders can accommodate borrowers with unconventional income sources or less-than-perfect credit histories.
- These lenders offer unique solutions tailored to individual financial needs, often unavailable through prime lending sources.
- Although interest rates and fees may be higher, the flexibility can outweigh these costs.
What Are Alternative Mortgage Lenders?
Securing a mortgage through prime lenders like big banks can be challenging for some borrowers in the competitive Canadian housing market. Alternative lenders are also known as B lending, subprime lending, or private lending. They include financial institutions, mortgage finance companies, mortgage investment corporations (MICs), independent private lenders (syndicate), and trust companies.
Alternative mortgage lenders offer financing options tailored to various circumstances and can provide mortgage options for those with high equity or net worth. They can also offer mortgage solutions for those who are self-employed, new to Canada, or have a less-than-ideal credit score. Alternative lending can help you achieve homeownership goals that might otherwise seem out of reach.
Who Are Alternative Mortgage Lenders?
Several alternative lenders in Canada can offer borrowers who do not meet the strict lending criteria of prime lenders the ability to secure a mortgage.
B Lenders (Subprime)
B lending offers mortgage solutions for borrowers with higher equity or net worth, who are self-employed, or who have non-traditional income. These mortgages typically have higher interest rates than prime lending, with terms typically lasting up to 1 year. However, some B lenders will offer terms of up to 5 years.
Private Lenders
Private lenders are individuals or entities offering mortgages without strict regulations, typically for short terms. Mortgages through private lending are non-income qualified (NIQ) financing geared to borrowers with poor or no credit history or other issues disqualifying them from prime and B lending.
Private mortgages should be used as a short-term mortgage strategy. They typically have short terms of 3 to 6 months to no longer than 2 years. They have significantly higher interest rates, and mortgage payments are interest-only, meaning you will need to renew, refinance, or repay the original amount borrowed at the end of the term. Private lending requires an exit strategy since the lender or investor may decide not to renew your mortgage at the end of the term.
Advantages of Alternative Mortgage Lenders
Choosing an alternative mortgage lender comes with several benefits:
- Flexible Approval Criteria: Unlike traditional lenders, alternative lenders consider broader factors like cash flow and equity over rigid income verification.
- Quick Access to Funds: These lenders often streamline the approval process, providing funds faster.
- Tailored Mortgage Solutions: They offer options for specific financial situations, from interest-only payments to short-term loans.
- Broader Property Choices: Alternative lenders may allow financing for properties that would not otherwise meet the lending criteria of prime lenders.
Disadvantages of Alternative Mortgage Lenders
While alternative lenders provide accessible solutions, there are some trade-offs:
- Higher Interest Rates: Rates are typically higher due to the increased risk lenders take on when lending to borrowers who may have non-traditional income sources.
- Limited Renewal Options: Borrowers may face challenges at renewal and need to refinance if switching to prime lending.
- Shorter Terms: Mortgages with alternative lenders often have shorter terms, requiring refinancing or full repayment sooner.
When Should You Consider an Alternative Lender?
An alternative mortgage lender could be the right choice if:
- You are self-employed and lack traditional income verification.
- Your credit score is below the threshold for prime lending approval.
- You need a short-term solution while improving financial stability.
- You are purchasing an unconventional property not typically financed by prime lenders.
Frequently Asked Questions
Are alternative lenders regulated in Canada?
Alternative lenders are regulated federally through the Office of the Superintendent of Financial Institutions (OFSI) or a provincial regulator to ensure borrower protection.
How much more expensive are alternative mortgage rates?
Depending on the borrower’s risk profile (credit score, equity in the property), rates for alternative mortgages could be 1% to 3%, with an additional 1% to 2% as a commission fee split between the lender and the mortgage broker.
Can I switch to a traditional lender later?
You can switch to a traditional lender at renewal. However, you must requalify for and refinance to switch to a prime lender.
Final Thoughts
Alternative mortgage lenders offer a lifeline to borrowers with unique financial situations, providing tailored solutions that traditional lenders may not offer. While these lenders often charge higher rates, their flexibility makes them a valuable option for many borrowers. If you’re considering an alternative mortgage lender, weigh the pros and cons and consult a mortgage professional to ensure the choice aligns with your financial goals.
Contact our mortgage professionals today for personalized advice and solutions that meet your needs.
