Alternative mortgage lenders: What you need to know

You are trying to get a mortgage, but the requirements from most traditional lenders are preventing you from getting one. It could be that your credit score is too low or that the down payment the bank is asking for is out of your price range.

This is where alternative mortgage lenders come in. Alternative lenders in Canada usually offer more accessible financing options than traditional lenders. It is also usually faster.

What are the different types of alternative mortgage lenders? And what are the pros and cons of going with an alternative lender? In this article, we will answer these questions and more. Here is everything you need to know about alternative mortgage lenders in Canada.

Who are alternative lenders in Canada?

Alternative mortgage lenders in Canada are usually defined as non-bank lenders. These alternative mortgage lenders include private lenders, credit unions, monoline lenders, and B-lenders.

Compared to more traditional banks, these alternative mortgage lenders are typically more flexible with their requirements. This means they usually cater to borrowers who fail to qualify for mortgages with banks due to low income, high debt, low credit, or failing the stress test.

5 alternative mortgage lenders in Canada

While there are many options for alternative mortgage lenders in Canada, here is a look at 5 that caught our eye.

Clearco
Formerly known as Clearbanc, Clearco offers revenue-based financing for e-commerce and SaaS-based small businesses. The Toronto-based company also provides early-stage founders access to capital, data-driven advice, and an extensive network of apps, agencies, and investors. The firm’s flexible and no-strings-attached offerings allow businesses to grow without giving up equity.

Fraction
Vancouver-headquartered Fraction is a fractional investment platform that allows users to access equity built up in their homes. It also grants fractional ownership of residential properties to clients, letting them get interest and monthly payments as returns. The company’s online tool helps customers develop financial plans for retirement and tackle debts as well.

FundThrough
FundThrough offers online invoice financing to small and mid-size enterprises. It also provides business owners better access to working capital by allowing them to utilize their customers’ credit strength.

Through the Toronto-based company’s platform, businesses can access between 80% and 90% of their approved invoice as a line of credit.

Ratehub.ca
Comparison website Ratehub.ca allows users to aggregate and compare financial products, including home loans, credit cards, and insurance. Ratehub.ca became part of the lending industry in 2020. It is now one of Canada’s leading mortgage and financial service comparison platforms, claiming to have a monthly user base exceeding 300,000. The company holds headquarters in Toronto.

Nesto
Customers can search and compare mortgage rates using Nesto’s AI-powered loan comparison platform. The online tool automatically links the user’s financial and property information to their private dashboard, allowing them to access loan options that suit them. The company is based in Montreal.

Alternative mortgage lenders in Canada: requirements
The requirements for alternative mortgage lenders in Canada vary, depending on which one you work with. However, we can look at a few considerations you should make before you commit to going with an alternative mortgage lender.

Credit

A good credit score may not be the first—or most important—thing alternative mortgage lenders look at when assessing your mortgage application. It’s one reason why you might be looking for an alternative lender in the first place. However, a good credit score may impact your application. While they likely won’t be as strict as a traditional lender’s requirements, some alternative lenders may, in fact, have specific credit requirements.

It is a good idea to check your credit score and ensure it is accurate and error-free before you apply for a loan with an alternative mortgage lender. Remember: alternative mortgage lenders will usually look at more than just your credit score. However, it might still affect your interest rate.

Stress test

Another differentiation between traditional banks and alternative mortgage lenders is that the latter will not necessarily be federally regulated. This means that you might be able to secure a home loan with an alternative lender without having to pass the stress test at all.

Down payment

Some alternative mortgage lenders will offer you a higher minimum loan-to-value (LTV) ratio. Again, this makes alternative lenders attractive to anyone who is unable to afford the larger down payments that typically come with home loans from traditional lenders.

What is an Alt-A mortgage in Canada?

Alt-A mortgages are typically considered in a lender’s risk management diversification. Alt-A mortgages have been known for high levels of default historically. In fact, their widespread defaults in the US were a key factor leading to the 2008 financial crisis.

Alt-A mortgages essential represent an alternative to other, more common types of home loans. For this reason, Alt-A mortgages usually have the following in common:

• Borrowers with lower incomes can qualify and sometimes there might be fewer requirements for documentation
• Alt-A mortgages might be approved for borrowers with a higher debt-to-income (DTI) ratio
• A borrower might qualify for an Alt-A mortgage even with a subprime credit score (restrictions might apply, however, for borrowers with recent foreclosures, bankruptcies, judgements, or charge-offs)
• Borrowers with higher LTV ratios might still qualify

Put simply, Alt-A mortgages are considerably easier to qualify for. However, it is still important that you are able to repay the mortgage over the long term.

What are the alternatives to banks for mortgages?

There are other alternatives to banks for mortgages. To give you a better idea of what these are, let’s look at three.

Private mortgages

Private mortgages are loaned out by private investors instead of credit unions or banks. Private mortgages are not regulated by the Office of the Superintendent of Financial Institutions (OSFI) or its counterparts provincially. This means private mortgages can be loaned out to risky borrowers. Because of this, private lenders often charge higher fees and interest rates, and are therefore often seen as a last-resort option for homeowners.

Alternative mortgage lenders may be the option you need to land your dream home.

B-lender mortgages

B-lender mortgages are essentially a step up from private lenders. Why? Because they can offer lower rates. However, the requirements are also a little more stringent. B-lenders typically deal with mortgages insured by the Canadian Mortgage and Housing Corporation (CMHC). This means they have requirements like maximum debt service levels and minimum credit score.

B-lender mortgages sometimes require only interest payments. They may also allow non-conventional income sources.

Bridge financing

If you are buying a new home but have yet to sell your current one, you may require financing to pay for the down payment on the new property. This is where bridge loans come in. Bridge financing enables you to get money to cover the new down payment while awaiting the sale of your current home.

Bridge loans are usually for a few months. Plus, they allow you flexibility when buying a home without the pressure to immediately sell. Bridge financing is offered by both traditional lenders like banks, but also private lenders.

What are the pros and cons of alternative mortgage lenders in Canada?

Getting a mortgage is a significant financial commitment. It is the biggest step financially most people make in their lives. For this reason, it is crucial that you weigh the pros and cons before reaching a decision.

Here is a look at the benefits and risks of going with an alternative mortgage lender in Canada.

Alternative mortgage lenders: the pros

Here are some benefits to using alternative mortgage lenders in Canada.

Loan options

Alternative mortgage lenders in Canada often offer similar mortgage products as traditional banks. However, they also offer a larger variety of loan options. These options include reverse mortgages, bridge loans, rent-to-own, construction loans, and seller financing.

Faster processing

Alternative mortgage lenders have more flexible criteria and fewer requirements than traditional banks. That means the process of acquiring a mortgage is typically faster. This is a significant benefit for borrowers who find a property they want and need to secure a mortgage quickly.

Flexibility

Compared to traditional lenders, alternative mortgage lenders offer more flexible terms and conditions. It is a major draw for borrowers to begin with. This makes it easier for borrowers with bad credit or irregular income to qualify.

Alternative mortgage lenders: the cons

Next, let’s look at some of the downsides in using an alternative mortgage lender in Canada.

Higher interest rates/fees

Alternative mortgage lenders are basically taking a larger risk when traditional lenders did not. Higher risk almost always means a higher interest rate. And compared to traditional banks, which are required to be upfront about costs, alternative lenders also tend to have more hidden fees.  

Less security

Traditional lenders are obligated to follow government regulations that protect borrowers. These regulations do not apply to alternative mortgage lenders. That means it is up to the borrower to conduct their own research to ensure the alternative lender is legitimate and compliant.

Alternative mortgage lenders: closing thoughts

Alternative mortgage lenders usually offer faster and more accessible financing options than traditional lenders. The lower requirements for credit scores and down payments that most alternative lenders offer may make getting in the door easier. However, it is still important to make sure you will be able to make monthly mortgage payments over the long term.

Before committing to an alternative mortgage lender, it is important to do your own research and your own budgeting.

To find out more about alternative mortgage lenders in Canada, get in touch with one of the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top-performing mortgage professionals across Canada. 

Did you find this information on alternative mortgage lenders in Canada useful? Does it sound like a viable option for you? Let us know in the comment section below.