What are Alternative Mortgage Lenders?
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Wondering what alternative mortgage lenders are? In this definitive blog post, you’ll learn all there is to know about the different, alternative types of mortgage lenders available to you.
- Conventional mortgages are offered by A-Lenders like the Big Six Canadian banks and other prime lenders. Alternative mortgages come from a huge range of lenders, as every offering is slightly different.
- Conventional mortgages have stringent approval processes and strict eligibility guidelines. Alternative mortgages provide another way for Canadians to buy their home.
- Alternative mortgages cover a wide range of products. Generally, these solutions come with higher interest rates than conventional mortgages, but may be easier to get approved for.
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Benefits of Using an Alternative Mortgage Lender:
Variety of Loan Options
Alternative mortgage lenders usually offer similar mortgage products as conventional lenders, while also offering a larger variety of loan options that not all conventional lender may offer, such as: bridge loans, rent to own, reverse mortgages, seller financing and constructions loans.
Faster Processing Times
Since alternative mortgage lenders have more flexible criteria and fewer requirements than conventional lenders, the process to acquire your mortgage loan is usually faster. This is a huge plsu for borrowers who find a home they really want and need to secure a mortgage fast.
Flexible Terms and Conditions
Alternative lenders usually offer more flexible terms and conditions than conventional lenders. In fact, looser guidelines and fewer requirements are what attracts borrowers to alternative lenders to begin with. This flexibility is especially beneficial for borrowers who are unable to qualify with conventional lenders for multiple reasons, including irregular income and bad credit.
No Prepayment Penalties
Typically, one way to avoid prepayment penalties is to get an open mortgage. Otherwise, different lenders will have different limits on the extra amounts you can pay on your mortgage. While this is also the case for alternative lenders, borrowers who do not qualify for an open mortgage with a conventional lender might be able to do so with an alternative lender.
Potential Downsides of Using an Alternative Mortgage Lender:
Higher Risk for Borrowers with Low Credit Scores
If you did not qualify for a mortgage with a conventional lender it might be because you are not in a good enough financial situation to take on a loan. Being unable to qualify for a mortgage is frustrating, properly assessing your financial situation before approaching an alternative lender is important in order to avoid putting yourself at financial risk with a massive loan.
Higher interest rates and fees
Since alternative lenders are essentially taking on a larger risk where a conventional lender did not, their offered interest rates will usually be higher. More so, alternative lenders tend to have more hidden fees than conventional lenders, who are required to be upfront about all costs involved in the mortgage process.
Less Security for the Borrower
The government regulations that govern conventional lenders and thus protect borrowers do not apply to alternative lenders. Ultimately, it is up to the borrow to do their research and make sure that the alternative lender is compliant and legitimate.
Alternative vs Traditional (Conventional) Mortgages Compared:
There are typically three types of appraisal: those for home buyers, home sellers, and those for mortgage refinancing (i.e. where someone already owns the home, but is looking to re-assess its current market value to get a new mortgage).
Conventional mortgages are generally valued for their low rates, predictable terms and conditions, and the security that comes from borrowing money from a federally regulated bank. Typically, they require a larger down payment (of at least 20%), since they rarely exceed 80% of the total property value. Conventional mortgage lenders will need to see that you can handle your monthly mortgage payments throughout the lifetime of the loan. To assess this, A-Lenders will look at things like your credit score and history, your income, your job, how much debt you have compared to your income, and whether or not you can pass a mortgage stress test.
Alternative mortgages, on the other hand, are generally sought for their relatively flexible eligibility requirements, and typically come with higher rates, and may cover a larger percentage of the total value of your home (known as the loan-to-value ratio).
|Mortgage Lender Type||Market Share (Q1 2021)|
|Traditional / A-Lenders||73.25%|
|MFC, insurance and trust companies||7.41%|
To put the demand for conventional and alternative mortgages into perspective, according to the Canada Mortgage and Housing Corporation’s January 2022 Residential Mortgage Industry Report, chartered banks accounted for 73.25% of total mortgage loan value originated in Canada in Q1 2021, whereas credit unions accounted for just 11.56%. Comparatively, private lenders provided 7.78% of the total mortgage loan value in Canada, and MFC, insurance and trust companies accounted for just 7.41%.
Types Of Alternative Mortgage Lenders
Home appraisers take into account a number of factors when they’re looking at a property. Here are the main details appraisers will assess during the appraisal process.
A private mortgage is a short-term, interest-only loan, offered by individuals or independent institutions. Generally, they have significantly higher rates than a conventional mortgage, since they are interest-only. They can be used as an alternative source of home finance for people with a poor credit history or other issues in the traditional approval process. Private mortgages are typically short-term, with amortization periods of six months to three years, after which time a responsible borrower may be in a better position to apply for a more conventional mortgage.
A-Lenders, like the Big 6 banks, are generally federally regulated. As a result, they have strict criteria for mortgage approval. Factors like strong credit and a stable income are a must. Even with these, however, many Canadians find themselves unable to get approved for an A-Lender or conventional mortgage. In this instance, many prospective homebuyers with good credit and a solid income, who otherwise could not qualify for a mortgage from a major bank, will look to B-Lenders. B-Lenders, although not directly regulated at the federal level, are still bound by some regulations, yet they often have more flexible eligibility requirements. Examples of these lenders include Mortgage Finance Companies like First National, Merix Financial, and RFA.
Bridge financing (also known as a bridge, or bridging loan), is a type of short-term financing used until a homeowner is able to secure a more permanent solution, or until they have removed an existing debt obligation. Bridge financing lets the recipient cover their existing debts by providing cash flow for a short amount of time, usually up to a year. Bridging finance typically has a higher associated rate of interest, and is commonly secured by collateral, like other real estate.
In Canada, a reverse mortgage lets you get money from your equity without having to sell your home, also known as ‘equity release’. You can borrow up to 55% of the current value of your home. The amount will depend on factors like your age, lender, and your home’s appraised value. A reverse mortgage is repaid when you move out, sell your home, or the borrower dies. You will not have to make any payments on a reverse mortgage until the loan’s due date, however, you will owe more interest on a reverse mortgage the longer you go without making payments. At the end of your term, you may have less equity in your home.
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While a conventional mortgage can help you buy an existing property, building from the ground up requires a construction loan. Also known as a construction mortgage, a construction loan is advanced incrementally during the building phase as the work advances. Often, interest is only paid during the construction period itself. Once the building is complete, the loan amount is due, however, some construction loans roll over into a conventional mortgage, depending on the lender and agreement you enter into.
A second mortgage involves taking out a second loan on an already mortgaged property, based on the level of equity you have. Second mortgages can come in the form of a Home Equity Line of Credit (HELOC), which is a revolving line of credit, or a home equity loan, which is a lump sum amount. Second mortgages are another form of equity release. In Canada, second mortgages are often used for debt consolidation purposes, home improvements, or as a loan for a downpayment.
Self-employed mortgages are loans designed for self-employed people, who have different assessment requirements than traditional borrowers. Some self-employed mortgages require income tax returns from the last 2-3 years plus financial statements as proof of income. If you’re able to provide this, you may be able to access the same mortgage products and rates as traditional borrowers. In addition to your Notices of Assessment, lenders may also ask for things like business financial statements, proof of paid HST and/or GST, personal and business credit checks, and proof of future potential earning, such as customer contracts showing expected revenues for the years ahead.Stated income mortgages, however, do not require proof of income, as long as the income stated is considered reasonable based on your industry and years of experience. Stated income mortgages usually have higher rates, and require a larger down payment.
Vendor Take Back Mortgages
A vendor take-back mortgage lets the property seller act as a lender for the buyer. The buyer still makes regular payments as with any other lender, at a rate of interest agreed by both parties. Generally, rates are higher than with a conventional mortgage, and borrowing amounts are typically lower than the high loan-to-value figures that conventional mortgages provide. With a vendor take-back mortgage, the seller retains equity in the home and continues to own a percentage equal to the amount of loan until the vendor loan is repaid in full.
Rent-to-own allows a prospective home buyer to rent a property for a specific period of time, with the option of buying it before the lease ends. Rent-to-own includes a standard lease agreement, with the option to buy the property at a later time. There are two main types of rent-to-own contracts, lease-option, and lease-purchase. With the former, you have the choice to buy the property before or when the lease ends. With lease-purchase agreements, you must buy the property at the end of the lease. In some cases, a percentage of the purchase price of the house is paid each month in the rent.
Who Are The Traditional or Alternative Lenders In Canada?
Below is a breakdown of some popular conventional and alternative lenders in Canada.
Traditional Mortgage Lenders
Traditional mortgage lenders have strict eligibility requirements that take into account your whole financial situation. These include a good credit rating, consistent income, manageable debt ratios, and a large enough down payment (typically 20% or more).
Alternative Mortgage Lenders
Alternative mortgage lenders come in all shapes and sizes. Each will have different interest rates and approval requirements, total borrowing amounts, and unique maximum loan-to-value coverage. Here is a list of several current alternative lenders in Canada by mortgage type.
- Alpine Credits
- Prudent Financial
- Clover Mortgage
- Calvert Home Mortgage
- Guardian Financing
- Sun Mortgage Corporation
- Threshold Mortgage Corporation
- Cliffton Capital Corporation
- Craigburn Capital
- Private Lender Inc.
- Dhugga Mortgages
- First National
- Merix Financial
- Radius Financial
- Home Trust
- Home Equity Bank
- Alpine Credits
- Equitable Bank
- Home Capital
- Merix Financial
- Street Capital Financial Corporation
How to Find an Alternative Mortgage Lender in Canada?
Different alternative mortgage lenders will offer very different mortgage products with their own terms and conditions. Much like when you’re looking for a conventional mortgage lender, you will need to have a solid idea of what you’re looking for as a mortgage loan before shopping around.
Furthermore, as a borrower, you will have to do your own research on the alternative lender of your choice to make sure they are reputable. To reiterate, alternative lenders are not regulated the way conventional lenders and banks are and therefore are more likely to engage in predatory practices. That being said, this doesn’t mean that that alternative lenders are not a legitimate source of financing; thousands of Canadians finance their homes with alternative lenders every year.
Frequently Asked Questions
Who should get an alternative mortgage?
Alternative lenders can help prospective homeowners with poor credit, high levels of debt, or unique income arrangements, e.g. those who are self-employed, or receive income from rental properties or from non-domestic sources. In addition, alternative mortgages can be useful for people looking to borrow more money with a higher loan-to-value ratio, and those looking to receive funding on a more short-term basis (such as with a bridge loan). Alternative financing is an umbrella term that covers a wide range of mortgage and loan solutions for people who cannot, or are not looking to, qualify for a conventional mortgage. If you have a unique financial situation and cannot qualify for a conventional mortgage, it may be worth exploring your options with alternative lenders and solutions.
Who should get a conventional mortgage?
If you’re looking to buy a home, have a good credit rating, a steady and well-paying job in Canada, and a sizable downpayment of between 10%-20% or more, a conventional mortgage may be for you. Conventional mortgages provide consistently lower rates for people who meet the eligibility criteria, and you may find yourself rewarded with the lowest rates available when A-Lenders see that your financial and employment history is stable, steady, and secure. Ultimately, prime lenders in Canada are looking for borrowers who represent the least risk possible, and the highest likelihood of repayment. If you do not have high levels of debt, can pass a mortgage stress test, and have an otherwise stable credit rating and income level, a conventional mortgage may be suitable.
Ultimately, not everyone can qualify for a conventional mortgage. Even if most of your application is solid, A-Lenders are notoriously stringent in their approval process, so don’t be disheartened if you don’t get a mortgage approved right away. There are a number of alternative mortgages available for a wide variety of life situations. From smaller banks to credit unions, there are other routes to homeownership in Canada, and more Canadians are utilizing these options each year. As long as you understand the ins and outs of the product you’re applying for, alternative mortgages are a viable way to help you get on the property ladder.
If you want to learn more about how to get a mortgage in Canada, speak to one of our trained advisors today.
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