Starting January 2018, new regulations will make it harder for homebuyers to qualify for uninsured mortgages. All borrowers even those with down payments of 20% or more, will now be required to take a buyer stress test.
This may mean a shift from traditional prime A lenders to the smaller alternative B lenders and provincially regulated credit unions for many mortgage hunters. In Canada we have 3 major types of mortgages which are based on the payment risk the lender faces:
A – Traditional prime lenders (large banks, virtual mortgage houses like First National & ING). These mortgages have lower chances of the borrower defaulting than non-prime mortgages.
B – Non-conforming/alternative or sub-prime lenders. “B” mortgages. These are riskier so lenders rely heavily on the equity in the subject property and/or on charging rate premiums to mitigate that risk.
C – Private lenders
Prime or A lenders focus on borrowers who have good jobs and credit history and are purchasing homes within the traditional guidelines. However, many borrowers don’t qualify for A lenders and mainstream mortgages are not for everyone, so the next option to consider may be the “B” lenders. Perhaps you are new to Canada, recently divorced or have past credit issues such as late payments, collections, or past bankruptcy. Maybe you need to use your self-declared income because you’re a small business owner or self employed.
B lenders normally consider each application on a case-by-case basis. They have similar strict qualifying criteria you need to fulfill, but they are able to look at the ‘overall picture’ of your financial situation and see what kind of mortgage would work for you, allowing for a more flexible approach.
Of course compared to the A Lenders, the B lender mortgage rates are higher, as your borrower profile is riskier than the average traditional borrower. B lenders charge a premium between 1-3 percent over traditional interest rates and usually lend for a much shorter term, starting as low as one year. In addition, there is usually a commitment fee and/or lender/broker fee charged up front, as a percentage of the total mortgage amount. A larger down payment of minimum 20% is usually required, as most B lenders do not provide high ratio mortgages. Also keep in mind that only fixed mortgages are available through this type of lending.
Also it is important to note that while most B lenders offer great pre-payment privileges, they also often charge more for paying out the mortgage early and are very strict about missed payments, so make sure check all the terms and conditions of your loans and understand them fully.
If you have good credit history and qualify for prime lending, should you still consider B lender mortgages? If the interest rate offered by the B lender is competitive to that of the big banks, then why not? You could save thousands in interest and be mortgage-free sooner. To stay competitive in a mortgage market largely dominated by big banks, B lenders often offer more competitive interest rates and usually have smaller penalties and offer more generous mortgage prepayment privileges.
People are often cautious about working with smaller and sub-prime lenders, as big name banks are associated with stability and safety, but that is just large advertising budgets at work. Most smaller mortgage firms and B lenders get their financing from large financial institutions and their source of financing is just as stable.
The proportion of mortgages given out by alternative institutions, other than banks or credit unions is still relatively small, only around 2.2% of the entire mortgage market, as per recent analysis from CIBC, but it has been growing steadily by about 25% a year since the last recession of 2008-2009. Recent government regulations have allowed alternative lenders to fill a key void in the market allowing credit options for a range of buyers.
A word of advice, don’t get too caught up on the higher interest rates of the B lender mortgages. Consider that it is only a temporary measure and is your stepping stone on your way to prime lenders. B Lenders can act as bridge to A lenders just after a couple of years, in times when you need refinancing the most.
For those considering a mortgage through an alternative B lender please make sure you shop around and get advice from an experienced and reputable broker to learn about all your available options to get the best mortgage out there for you.
If you have any questions about the new regulations or have any other real estate related questions, please contact us at any time.