A recent data analysis by CIBC World Markets shows that a growing number of Canadians now are considering mortgages from alternative lenders (B lenders, subprime or private lenders). These types of mortgage lenders work with borrowers who may not qualify for a traditional mortgage because of poor credit or other issues, so they charge higher interest rates to cover the higher risk.
Coast Capital, for instance, will charge borderline borrowers a rate premium of one to two per cent and may add a fee half to one per cent of the mortgage borrowed. An alternative lender’s overall cost may be the same or lower, but the advantage may be that they ask for less documentation and possibly allow a larger mortgage. Growing competition amongst alternative lenders is leading to more competitive rates and lower fees for borrowers.
Most people who borrow from alternative lenders have a unique situation. Some are looking for construction loans or a short-term loan as they have an exit plan. Maybe they have poor credit, or don’t show enough income to qualify under a traditional lender’s tighter restrictions.
Some borrowers use “B” and private lenders as a temporary, “Band-Aid” solution that allows them to rebuild their credit using a two-year term and then moving to a traditional lender. Or if they are waiting to free up cash from the sale of another property or an expected inheritance, an alternative lender might help bridge that gap. But because interest rates are typically higher than with a traditional lender, I encourage buyers to have an exit plan with a specific timeline rather than sticking with a higher-interest loan indefinitely.
One potential benefit of an alternative lender is that they are not confined to the rules of traditional lenders (banks, credit unions and monoline lenders) so in some cases, income, credit or the type of property may not be as important to an alternative lender. While traditional lenders are wary of micro-units and leaseholds, some alternative lenders will extend loans on these types of properties. Keep in mind, though, that you should consider your own income and risk tolerance before taking out a mortgage.
One scenario where it might make sense to use an alternative lender is when the borrower is able to write off interest on a rental property. However, in many cases, the higher cost of an alternative loan might negate the savings in tax write-offs. An independent mortgage broker can help you explore all of your borrowing options and run the numbers to help you compare costs between lenders.