Alternative lenders are more popular than ever with homeowners. Today, banks are very generalist about their financial services. They are not known for creative solutions that adapt to various career types. This can be discouraging for homeowners who don’t fit into a generalized customer box.
Obtaining a mortgage with a big bank can be difficult and that’s why customers are turning to alternative lenders who offer more innovative solutions. Here’s our guide to help you understand where alternative lenders fit into the mortgage world.
The ABC’s of the Lending World
A-Lenders
1. Big Banks
Financial Institutions regulated by OFSI, for example, TD Canada Trust, Scotiabank, BMO, Royal Bank of Canada, CIBC, National Bank of Canada.
2. Credit Unions
Non-profit cooperatives where members can borrow from pooled deposits at low-interest rates. Alterna Credit Union, Meridian and Desjardins are popular examples.
3. Monoline Lenders
Monolines typically don’t offer any other lending services (like car loans) or deposit services (bank accounts, RRSPs), and usually don’t have physical locations. They have to abide by strict government regulations to offer mortgages only, like MCAP and First National.
B-Lenders (Alternative Lenders)
These are responsible financial institutions that don’t fit into the A-Lender category. They operate under different legislation and can offer excellent products that traditional branch-based lenders cannot. These institutions are attractive for customers with bruised credit, self-employed individuals, or applicants requiring a high cash flow ratio tolerance, who can’t fit into the structured criteria required to borrow from A-Lenders.
It is important to note that most Monoline lenders are now offering a “B” option so they can continue to support more clients.
C-Lenders (Private Lenders)
Private lenders include mortgage investment corporations, investors who pool their capital (syndicated mortgages), or individuals lending their own money. Depending on the situation, these lenders can consider less than a 20% downpayment (required for A and B-lenders).
C-lenders are popular for second mortgages when a homeowner is too far out from their maturity date to break their existing product, or their credit is ‘bruised” and a second, more short-term product can help repair their score for a return to the A-lender space.
When Alternative Lenders can Help
| Possible Limitation with A-Lenders: Cannot pass the mortgage stress test: the individuals obtaining the mortgage exceed the maximum debt-service ratios to pass this mandatory test. Possible Solution with B-Lenders: Alternative lenders allow for expanded debt-service ratios and are not as constrained as traditional lenders usually are. | |
| Possible Limitation with A-Lenders: Low or no credit scores: “Bruised” credit can happen with too many late payments, high credit balances, a history of collections, or bankruptcy. No borrowing history can also work against a mortgage consumer. Possible Solution with B-Lenders: Alternative lenders will consider scores of 500 or lower…but those applications will require a higher interest rate. These institutions are subject to different legislation than A-lenders, which allows for greater tolerance of damaged credit histories. | |
| Possible Limitation with A-Lenders: Non-traditional income and/or Self-employed: Non-traditional income sources such as commission-based, tip-supported, or self-employed applicants with a lot of deductions are frequently not recognized by traditional lenders. Possible Solution with B-Lenders: Most B-Lenders are more relaxed in their approach to self-employed applicants. They are more receptive than A-Lenders when it comes to non-traditional income sources like tips, Child Care tax benefits, and commission income. |
The Implications of choosing an Alternative Lender
1. Interest Rate
Usually, your interest rate will be a bit higher with an Alternative Lender than those offered by an A-lender. These days, they mostly range from 2.34% to 5.99%. Compared to 2-2.5% with regular institutional lenders. The lender will be commensurate with the perceived risk of the file with the lowest rates typically reserved for a one-year or two-year term.
2. Lender Fees
Most of the time, your B-lender will charge a one-time fee of 1%-1.5% of the mortgage amount, with C-lenders usually higher around 1-3%. Sometimes it is possible to build this cost into the mortgage product so the consumer does not require additional cash flow upon closing.
3. Brokerage Fees
Alternative mortgages can come with a cost for a mortgage broker (or agent), to be paid by the borrower in the form of a brokerage fee. This cost is usually based on the following considerations:
- The complexity of mortgage product
- The Broker’s experience in alternative lending
- The size of the mortgage
Legally, these fees must be specifically disclosed to the mortgage consumer early in the mortgage application process. They are due on your closing date and will require additional cash-flow considerations from the borrower.
Different but Safe, Secure, and Inclusive
Alternative lenders are not to be disparaged. These institutions comply with their own strict set of government rules and successfully service 15-20% of the mortgage consumer market. They have a very important place in the mortgage industry and have proven that rigid A-lender guidelines limit responsible, qualified borrowers from accessing the housing market.
Alternative mortgage products are often structured in shorter terms (1-3 years) and customers frequently move on to A-lender products when possible at renewal, to save on long-term interest rate charges. However, some borrowers remain in the B-lending space for the full length of their mortgage. They are grateful to have access to these more creative products.
Mortgage Agent and Broker Value
If you or someone you know is looking for an alternative lender, you have to put them in touch with a mortgage professional. Alternative Lender products are usually more complex than A-lender products and require a mortgage agent to facilitate the agreement. If you have never used a mortgage agent before, you will certainly discover their experience and wisdom add a lot of value to the process.
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