Lenders, including banks and credit unions, regularly turn down mortgage applications from potential home buyers, even those with large down payments.
The reasons vary. The home buyer may be a self-employed entrepreneur and their earnings appear as a low income on a bank statement. The home buyer may be a new immigrant without a credit rating, or they may have a bad credit rating which they’re trying to improve.
The buyer may also have problems meeting the new stress test which requires federally regulated lenders to ensure borrowers can meet the greater of the Bank of Canada’s five-year benchmark rate or the contractual mortgage rate plus two per cent.
This is where alternative lenders can help with mortgage financing, according to Ajay Soni, president of the Canadian Mortgage Brokers Association, past president of the Mortgage Brokers Association of BC and a mortgage broker for 30 years.
In BC, mortgage financing generates between $40 and $50 billion in activity.
“Approximately $3 billion of this is in residential mortgages and another $2 billion in the development and construction side,” said Soni.
Canada-wide, alternative lenders account for 2.5 per cent of the lending market according to a report by CIBC, a rate that has doubled since 2012.
Loaning to riskier borrowers comes with a price tag.
Mortgage rates from an alternative lender are typically higher and vary depending on whether the borrower is getting a bridge mortgage, a second mortgage or third mortgage, or whether they’re refinancing to renovate a property or consolidate debt.
Benefits to borrowers include the opportunity to build or repair credit, or have greater flexibility in structuring loan and payment terms.
Potential home buyers looking for a mortgage should make sure they’re prescreened and prequalified.
As in all matters, buyers should beware.
Alternative lenders aren’t regulated by the Office of the Superintendent of Financial Institutions, an independent federal government agency responsible for supervising Canada’s banks and federally incorporated trust, loan, and insurance companies.
Instead, in BC alternative lenders are regulated by the Financial Institutions Commission.