Don’t let the recent Bank of Canada interest rate hikes and reports of average house prices in the $300,000 range put you off from finding a mortgage. Potential borrowers, who would have been turned away from banks even a few years ago, are finding there is still hope for them through non-traditional lending channels and products.
A self-employed entrepreneur who minimizes his income for tax purposes, an investor considering a rental property, a couple getting back on their feet after credit difficulties: these are all examples of the sorts of people who are benefiting from more choice in the mortgage marketplace.
Driving this trend are two factors: (1) a host of new lenders, like X and Y; and (2) new types of mortgages, like the new 30- and 35-year amortization products.
“The hunt for a great mortgage rate has changed over the years. Historically, mortgage seekers would approach an ‘A lender,’ such as a major bank, for a mortgage that would involve strict guidelines including at least five per cent down payment, a rigid proof of income and credit score requirements,” says Andrew Moor, president and CEO of Invis, one of Canada’s largest mortgage brokerage firms.
“Those who didn’t qualify for financing were faced with going to private lenders, whose easier mortgage approval came with usually double-digit interest rates, a much larger down payment, and in some cases a sizeable fee.
“For borrowers, the gap between these alternatives was huge, and would add up to thousands of dollars in additional interest charges,” Moor adds.
But that gap between the traditional “A” lenders and private lenders has seen far-reaching transformation over the past few years. In addition, entirely new “alternative” lenders — both home grown and from the U.S. — have entered the Canadian market to cater to a wider range of mortgage clients. These new mortgage lenders and their subsequent products now account for just less than 10 per cent of the mortgage market in Canada.
Here’s a brief overview of the current mortgage marketplace in Canada:
• The “A” lenders: offer traditional mortgages but lately have introduced mortgages that reach out to new clients, such as creditworthy self-employed individuals who minimize their income for tax purposes.
• Lenders who offer “near prime” mortgages: products that are intended for clients whose credit scores may disqualify them for an “A” mortgage, but whose circumstances are otherwise solid.
Lenders offering “sub-prime” or “non-conforming” mortgages. For example, 100 per cent no down payment mortgages, or mortgages for those with lower credit scores or past bankruptcies.
• Private lenders: provide a valuable service to many borrowers — who cannot access other lenders — at slightly higher interest rates.
“While those with less than stellar credit ratings may not qualify for a discounted interest rate, the rates for these non-traditional mortgages are not as high as you think,” Moor says.
Consumers interested in these new mortgages will usually need to consult a mortgage broker, such as those at Invis.
Many alternative lenders market their mortgages only through mortgage brokers, who are able to advise clients on the various features, and match them with the mortgage that best suits their individual circumstances.