For aspiring homeowners in Canada, qualifying for a mortgage is crucial. Are there alternative mortgages available? Find out here
While most people in the Canada dream of homeownership, not everyone has the qualifications and financial means to buy a property. Some struggle with their borrowing history, while others fail the stress test given by prime lenders. When these problems arise, aspiring homeowners become discouraged.
But there is a solution, and that is alternative mortgages.
In this article, Canadian Mortgage Professional will discuss everything you need to know in your quest for an alternative mortgage. We will talk about how alternative mortgage lenders differ from the typical lending companies that borrowers are used to. We will also shed light on the common types of alternative mortgage.
To our usual pool of readers who are mortgage professionals, this guide to alternative mortgages is one of our client education pieces. It can help your prospective and current clients understand how alternative mortgages can help them—especially if they are looking for more home loan options. Feel free to send this to them!
What is an alternative mortgage?
Alternative mortgages are exactly what they are called—an alternative home loan to the typical mortgages offered by big banks and prime lenders.
If you have a bad credit score or a low gross income, for instance, you have bigger chances of getting rejected by Canadian A lenders. However, consulting with an alternative mortgage lender might be the answer to ensuring that you still buy that house. It can help you secure the right home loan based on your personal circumstances.
This option is suited for aspiring homeowners who do not pass the mortgage stress test set by most lenders in the country.
Learn how the mortgage stress test works in this video:
Alternative mortgage lenders are challengers to traditional lenders like Big Six banks, but they are under threat as well. Read this article about alternative lenders being targets of acquisition.
What are alternative mortgage lenders?
An alternative mortgage lender is any lender outside of a traditional bank or conventional mortgage providers. These kinds of lending institutions are sometimes called subprime lenders or B lenders. Alternative mortgage lenders can give you mortgage options that are not available from traditional banks. Applying for a property loan with them can also include these perks:
- unique loan terms
- more lenient qualifications
- quicker mortgage application process
- online completion for the mortgage application process
Conventional mortgage lenders will ask their clients about the latter’s credit background and employment history. Such personal details are important when applying for a mortgage because these are their basis for a borrower’s capacity to repay the mortgage. If clients do not reach the criteria set by the lender, it can make them look unsuitable and can be seen as high risk. This is also why commercial banks and traditional lending companies apply the mortgage stress test.
Typically, alternative mortgage lenders would be a good option if you have problems with your credit background, employment history, or both. That’s because alternative mortgage lenders offer more flexible options compared to conventional lenders.
Find out more about the growth of alternative mortgage lending in this article.
How are alternative mortgage lenders different from conventional lenders?
Alternative mortgage lenders are different from conventional mortgage lenders mainly when it comes to their qualifications for their clients. For instance, you will need a verified income and a good credit score to get approved for a mortgage from conventional mortgage lenders, especially the big banks.
In contrast, alternative mortgage lenders are more relaxed when processing your mortgage application. They focus on the amount of equity you possess instead of your source of income, for example, which conventional mortgage lenders review. Alternative mortgage lenders also use factors other than income and credit score to underwrite the proposal.
Different kinds of alternative mortgage lenders
Check out these alternative mortgage lenders that can help you secure a property loan:
- B lenders
- credit unions
- private lenders
- monoline lenders
- bad credit lenders
- bridge financing lenders
- reverse mortgage lenders
- self-employed mortgage lenders
Curious to know more about how to finance your mortgage with alternative lending? Check out this video:
Check out our 2024 Brokers on Lenders page for a list of the top alternative lenders in the country.
Most common types of alternative mortgage
Now that we have covered the basics of alternative mortgage lenders, the next step is to choose which type to go with. Here are the most common types of alternative mortgages:
- B lenders mortgages
- bridge loans
- seller financing
- rent-to-own
- private lenders loans
- multiple collateral mortgages
- B lender mortgages
Let's check them out one by one:
1. B lenders mortgages
A lenders, like the major banks, are federally regulated and have stricter criteria for mortgage approval. On the other hand, B lenders, while still adhering to some regulations, are not directly regulated federally. For this reason, it is common for B lender mortgages to have more flexible eligibility requirements.
Watch this clip to know more about B lenders:
2. Bridge loans
A bridge loan, which is a short-term loan, will not help you get approval for a bank mortgage right away, but it will serve as a stepping stone. When you apply for a bridge loan with an alternative mortgage lender, it will help you become bankable. In other words, it is a way to improve your finances enough to qualify for credit even from a conventional mortgage lender.
Find out how alternative lender Glengarry Farm acts as a transitional lender for farmers who need financial help.
3. Seller financing
Seller financing can be difficult to secure but is also flexible if you can negotiate successfully. A prime example of seller financing is when a home seller offers to hold back the mortgage on the property as you finance the purchase. This kind of alternative mortgage option is not as common but is suitable for buyers with unique circumstances.
4. Rent-to-own
For rent-to-own financing, you can essentially live in your home now and then apply for a mortgage at the end of the rent-to-own term. Typically, rent-to-own programs are formulated as long-term leases with the choice to buy at a pre-determined price. It becomes an alternative mortgage option since you will have the chance to purchase the property once the rental term is completed.
5. Private lenders loans
While technically still structured as mortgage providers, private lenders are usually more relaxed in terms of guidelines. They would be more willing to offer you financing when a conventional lender is not. For a private lender, however, you will likely be required to make a 15% down payment. You also need to have higher interest rates than you would face from a conventional lender.
6. Multiple collateral mortgages
A multiple collateral mortgage is when you use more than one property or asset, such as vehicles and investments, as collateral for a single mortgage. This can help you qualify for a larger loan or better terms, as the lender has more assets to back up the loan.
A multiple collateral mortgage works well for real estate investors who have multiple properties to put up as collateral.
This type of alternative mortgage comes with some risks: you stand to lose all the collateral you put up if you default on the loan. It’s best to speak with a mortgage broker for a thorough discussion of your options.
7. Construction loans
Lastly, you can go for a construction loan as an alternative mortgage. These are short-term loans designed to help pay for building a new home or making major renovations to an existing one.
Watch this video to find out how construction loans work in Canada:
Did you know? The Canadian Alternative Mortgage Lenders Association (CAMLA) was launched in 2022 to support the growing number of alternative lenders in the country.
Other options for alternative mortgages
If you cannot decide on any of the alternative mortgages above, Check out these other options for alternative mortgages in Canada:
- reverse mortgages
- second mortgages
- self-employed mortgages
- vendor take back mortgages
Do alternative mortgage lenders offer similar loan packages like conventional lenders?
Alternative mortgage lenders offer similar loan packages to conventional lenders. These include:
- first mortgages
- second mortgages
- home equity loans
- home equity lines of credit
- mortgage refinance debt consolidation
Alternative mortgage lenders also offer products (usually more flexible) that conventional lenders do not, such as:
- stated income mortgages
- CRA debt consolidation mortgages
- mortgages for poor or bad credit owners
- 100% rental offset mortgages property tax mortgages
Why are alternative mortgages popular?
Because alternative mortgages in Canada are not regulated in the same way as conventional mortgages, alternative lenders are able to make some exceptions.
For instance, conventional lenders such as commercial banks have been forced to cut down on the size of mortgage loans. This is after new federal mortgage laws were enacted in Canada. These new laws placed added pressure on some clients because they limited the percentage at which you can refinance your property.
Alternative mortgage lenders boast that they are the more flexible option compared to conventional mortgage providers—even if their interest rates are higher. This makes alternative mortgage lenders key players in your ability to refinance homes.
Finding an alternative mortgage lender in Canada
While the possibility of getting rejected on mortgage applications must be considered by aspiring homeowners, finding an alternative mortgage lender can turn that upside down. This has opened opportunities for Canadians who cannot qualify for property loans through conventional lenders.
If you think that applying for a home loan with an alternative mortgage lender suits your personal preference and financial capacity, do not make a hasty decision. Instead, talk to your mortgage broker for expert guidance and advice.
Have you considered applying for an alternative mortgage instead of the common property loans offered by prime lenders? How was the experience? Share your insights in the comments section below
