Alternative Mortgage Lenders in Canada

What are Alternative Mortgage Lenders?

When Canadians look for a mortgage lender, Canada’s six major banks often come to mind: RBC, TD, Scotiabank, CIBC, BMO, and National Bank. According to the CMHC 2019 Residential Mortgage Industry Report, these six banks accounted for 67% of all mortgages in Canada.

In the first half of 2022, chartered banks originated $191 billion in mortgages, while non-bank lenders originated $110 billion in mortgages. So all banks took a 63% share of the mortgage market in 2022 compared with 67% for just the big six banks in 2019. Thus over the past three years, big banks are losing market share while alternative lenders are gaining market share.

Some people are only familiar with Canada’s big six banks and thus consider any lender other than the big six banks an alternative lender. With this definition, you can look to alternative lenders to get a better rate than the big banks' mortgage rates.

The same laws and regulations set mortgage lending rules in all Canadian banks. The most important regulation regarding residential mortgage lending is Guideline B-20 which applies to federally regulated financial institutions. An alternative mortgage lender would be defined as a non-bank lender.

The banks are also called “A Lenders.” Canadians are more familiar with large banks in their everyday lives, but these banks are also strict in their lending requirements, such as income, debt levels, and credit score for a mortgage.

This is because Guideline B-20 emphasizes that the lending decision should be made based on the ability and willingness of the borrower to pay back their loan. The lenders are directed to avoid over-reliance on the value of the collateral.

Alternative lenders, which are not federally regulated and thus do not have to obey Guideline B-20, can rely on the collateral's value and be more lenient in assessing the borrower's income and creditworthiness.

A combination of higher home prices and tougher regulations are pushing more people toward alternative lenders. Over the past year, increasing mortgage rates have intensified this trend. This trend can be recognized by comparing the following two pie charts. Loan value outstanding data represents the market share over the past 5 years or so, while origination data represents the more recent market share.

As of the end of the third quarter of 2022.

During the third quarter of 2022.

Being declined for a mortgage by a major bank shouldn’t prevent you from getting a mortgage or buying a home if you can comfortably afford the mortgage payments. Alternative lenders don’t have as tough mortgage eligibility criteria as the big banks, and they are much more flexible and understanding in their policies. Some alternative lenders are willing to take on more risk in exchange for charging higher interest. They might also be more comfortable facing default and liquidating the underlying property.

Alternative mortgage lenders include private mortgage lenders, monoline lenders, B-lenders, and credit unions. For example, you might not be able to afford a mortgage for your desired house but are confident that your income will rise and you will be able to afford it in a few years. The problem is that you think your desired house might be much more expensive in a few years. In such a situation, you can take an interest-only mortgage from an alternative lender and roll it into a conventional mortgage when you achieve a higher income level. You can compare payments of an interest only mortgage with a conventional mortgage.

Market Share of Mortgages by Lender Categories

Market Share Source: CMHC 2019 Residential Mortgage Industry Report

What Do Alternative Mortgage Lenders Do?

Alternative mortgage lenders compete with chartered banks. For a similar product, consumers most likely prefer working with banks as they are more familiar and considered more trustworthy. Thus alternative lenders compete either by offering lower rates or by showing more flexibility in judging borrowers' ability to repay their loans.

By showing more flexibility in lending, alternative lenders lend money to people who might not qualify for a traditional mortgage at a bank. This could be because the borrower has failed the mortgage stress test, has high debt levels, or has a low credit score. Alternative lenders are also more accommodating regarding the type of income, such as considering non-traditional income, when looking at the affordability of a mortgage based on a borrower’s income. This might include rental income from rental or investment properties, foreign income, or self-employment income.

You do not need to have your mortgage at your primary financial institution. Financial institutions, such as Canada’s major banks, have strict requirements when looking at who they will lend a mortgage to. Banks are required to conduct a mortgage stress test to see if you can absorb financial shocks and continue paying your debts. Failing the mortgage stress test, such as if your debt levels are too high or if your income is too low, will mean that you won’t be able to qualify for a traditional mortgage at a bank.

You will also need to pass the stress test if you are looking to refinance your mortgage or switch your mortgage to a major bank. This means that failing the stress test will prevent you from borrowing more money from your home equity or switching to another bank that offers a lower mortgage rate. You do not need to pass the stress test if you renew at the same lender.

Types of Alternative Mortgages

Private Mortgages

Private mortgages are lent out by private investors rather than by a bank or credit union. They are not regulated by the Office of the Superintendent of Financial Institutions (OSFI) or its provincial counterparts, which means that they can lend out to risky borrowers. To make up for this, private lenders usually charge higher interest rates and fees. You can access private lenders through mortgage brokers.

A private mortgage lender is often a last-resort option for homeowners. They mainly require you to have home equity rather than a sizable income or credit score. Private mortgages have short terms, with most being less than one or two years (e.g. 6 months).

A private mortgage can give you time to get your financial situation back on track in order to transition back to a traditional mortgage lender with lower interest rates at the end of your term. Making on-time mortgage payments, building up your credit score, and paying down debt during this time can help you qualify for a traditional mortgage.

B-Lender Mortgage

B-Lenders are a step-up from private lenders as they can offer lower rates but they also have more stringent requirements. B-Lenders mainly deal with CMHC insured mortgages, which means that they have requirements such as a minimum credit score and maximum debt service levels.

B-Lenders can offer mortgages with features such as requiring only interest payments or allowing non-conventional income sources, such as being self-employed.

Bridge Financing

If you are in the process of purchasing a home but haven’t sold your current home yet, you might need financing to pay for the mortgage down payment of the new home. Bridge loans allow you to receive money to cover the down payment while you wait for money from the sale of your home. Bridge loans are usually for a few months and can allow you flexibility when purchasing a home without pressure to immediately sell your existing home.

Bridge gap loans are offered by traditional lenders, such as banks, as well as private lenders.

Reverse Mortgage

A reverse mortgage provides you a steady stream of cash, rather than you having to make mortgage payments to the lender. Reverse mortgages are offered only to those over 55 years old in Canada. They do not require you to make monthly mortgage payments and they also don’t require you to have any income.

A reverse mortgage allows retirees to supplement their income during retirement by unlocking the equity in their home without needing to sell their home. The reverse mortgage and accumulated interest are due once the borrowers sell the home, move, or pass away. Reverse mortgage rates are higher than conventional mortgage rates and high ratio (insured) mortgage rates.

Construction Loans

A construction loan provides temporary financing for you to have a home constructed from the ground up. Some construction loans required interest-only payments. Once the loan expires, construction loans can be extended, paid back in full, or rolled over into a mortgage.

Second Mortgages

A second mortgage allows you to borrow more money when you already have an existing mortgage. Second mortgages are based on the equity that you have. Higher home equities will allow you to borrow more money.

Second mortgages include home equity loans and home equity line of credits (HELOC).

Self-Employed Mortgages

Self-employed mortgages are for borrowers that rely on self-employment income or business income. Tax deductions can reduce a self-employed worker or business owner’s reported income. With a self-employed mortgage, the lender will consider your self-employment income or business income by adding a gross-up to increase your self-employed income by 15%, or by adding back the deductions to your income. This can help you qualify for a larger mortgage than you otherwise would be eligible for.

For self-employed borrowers, alternative lenders can offer stated income mortgages which require no income verification.

Vendor Take Back Mortgages

A Vendor Take Back Mortgages (VTB Mortgages) is a type of seller financing that lets you get a mortgage directly from the seller of the home. The seller will let the buyer borrow money to purchase the home, which allows buyers to bypass mortgage lenders entirely. You won’t have to worry about being approved for a mortgage from a lender if the seller is willing to provide a VTB mortgage, however, the seller might charge a high interest rate.

Rent-to-Own

Rent-to-Own Homes allow renters to choose a home currently listed for sale on the market to rent. During their lease, the renter will build up their down payment and possibly improve their credit score or debt levels. At the end of the lease, renters have the option to purchase the home at a locked-in price. This lets potential home buyers live in a home that they are planning to buy, while giving them time to prepare financially for the purchase of the home.

What Alternative Lenders Can Help With

Bad Credit

Major banks in Canada require a credit score of at least 600 for you to be eligible for a mortgage. Alternative lenders have lower requirements or no requirements at all.

For example, B-lenders often accept borrowers with credit scores as low as 500. Private lenders may have no credit score requirement, and they might not even need to check your credit report.

Debt Levels

When applying for a mortgage, lenders will look at your debt service ratios, specifically your gross debt service (GDS) and total debt service (TDS) ratios. These ratios measure how your income compares to your cost of housing and debt payments.

Banks require you to have a GDS ratio of 39% or less, and a TDS ratio of 44% or less. If you’re looking to get an insured mortgage, CMHC mortgage rules have the same guidelines.

Alternative lenders can have higher maximum limits. For example, Haventree Bank is a federally regulated Schedule 1 Bank that targets borrowers looking for an ‘alternative mortgage solution’. Haventree Bank allows your debt service ratios to be as high as 60% for some mortgages with a down payment of 35% or more.

We should note that OSFI does not specify a maximum for debt service ratios. Instead, it expects the federally regulated financial institution to establish a maximum for the average of TDS and GDS in their portfolio. These values should be specified in the lender's Residential Mortgage Underwriting Policy (RMUP).

Unconventional Income

Self-employed individuals, business owners, investors, and commission salespersons might find it harder to get a mortgage with a major bank. Alternative lenders can help those with non-traditional income get a mortgage.