A vast majority of mortgages (72% of all outstanding residential mortgages), are lent through Canada's Big Six Banks: RBC, TD, Scotiabank, BMO, CIBC, and National Bank. RBC mortgages make up 27.4% of Canada’s $992 billion mortgage market, making the Royal Bank of Canada the largest mortgage lender in the country. These “A Lenders”, along with other chartered banks such as HSBC, have relatively strict criteria for prospective mortgage applicants. This can include requiring a strong credit score and a stable income.
Who can you turn to if these A Lenders turn you down? B Lenders offer an alternative to the big banks, and in some cases may even save you money.
A Lenders are chartered banks that are federally regulated along with credit unions that are provincially regulated (with the exception of Coast Capital and UNI being federal). A Lenders typically lend to prime borrowers, which are borrowers with a good credit score and history, as well as a stable income.
B Lenders are quasi-regulated lenders where they are not directly regulated federally but indirectly follow regulations due to the nature of their business. B Lenders include Mortgage Finance Companies (MFCs), which made up 20% of all insured mortgages in Canada but only 3% of uninsured mortgages in 2019.
A credit score represents how you manage credit, such as how long you have had credit, the balance that you are carrying, if you have missed any payments, or if you have had debts referred to a collection agency or have defaulted on. Banks and financial institutions, among others, can use your credit score to make decisions on whether or not they want to lend you money.
A low credit score may affect your ability to get a mortgage approvalfrom A Lenders, and it may affect the interest rate that you are eligible for.
There is a set minimum credit score for insured mortgages. The Canada Mortgage and Housing Corporation (CMHC) requires a minimum credit score of 680 from at least one signer or co-signer for issuing CMHC mortgage insurance.
Self-employed mortgage applicants may be required to show two years of tax returns or financial statements to prove their self-employment income. Those with less than two years of history might find it harder to qualify for a conventional mortgage.
Applicants whose income relies on commission, such as commission-based sales jobs, may find it even harder to qualify, due in part to the possibility of wildly fluctuating income.
A conventional mortgage is a mortgage that is not for more than 80% of the property’s value or purchase price. This means you will need to make a downpayment of at least 20%, and the mortgage will not be CMHC insured. Uninsured mortgages carry a higher level of risk to the lender, and so they may have higher interest rates than insured mortgages.
B Lenders are an option for those denied by traditional A Lenders or for those looking for more flexibility, but they can often be the lender of choice for those with strong credit and stable incomes. In fact, the four major Mortgage Finance Companies (MFCs), MCAP, First National, Merix, and RFA, collectively account for 12% of all outstanding mortgages in Canada. Compared to a less than 2% share in 2001, B Mortgage Lenders are becoming an ever more popular choice.
These alternative mortgage lenders may also be more accommodating to an individual’s needs, such as providing interest-only mortgages to reduce monthly payments for those that are cash-strapped. This allows those that would otherwise not qualify for a traditional mortgage the opportunity to own a home.
What are interest-only mortgages, and can you really only pay interest on a mortgage? Surprisingly, interest-only mortgages exist, with Merix Financial being the first lender in Canada to provide this innovative product. Instead of mortgage payments going towards both the interest and paying down the mortgage principal, as the name suggests, the payments will go fully towards the interest portion only. This means that once the mortgage term is expired, you will still owe the same amount of principal as before.
Whether or not an interest-only mortgage is a good idea depends on your own personal situation. By paying only interest, your required mortgage payments will be smaller. This allows you to have more cash available to use for other purposes, such as paying down high-interest credit card debt. Interest-only mortgages may also be used to put the temporary cash savings to work by investing what would otherwise have gone towards the mortgage principal.
B Lender may offer better rates than the Big Banks for insured mortgages, however, CMHC insured mortgages have the following mortgage requirements:
CMHC also requires a minimum credit score of 680 from at least one cosigner. B Lender mortgage companies may charge additional fees as CMHC mortgage insurance costs can be passed on to you.
There are options available, such as purchasing mortgage default insurance from a private provider, or choosing an uninsured mortgage instead if possible. Canada Guaranty and Sagen (formerly Genworth) both provide mortgage insurance in Canada.
A minimum downpayment of 5% is required, with Canada Guaranty premiums being 4.50% and Sagen premiums at 4.00% as of 2020 . These mortgage insurance premiums are non-refundable. Mortgage downpayments of more than 35% can have a premium as low as 0.60%.
All mortgages with a downpayment of less than 20% are required to have mortgage insurance. Canada Guaranty requires a downpayment of at least 10% for self-employed individuals with higher insurance premiums.
MCAP Financial Corporation was the first Mortgage Finance Company in Canada. Now with over $100 billion in assets, MCAP is also one of Canada’s largest MFCs. MCAP offers plenty of flexible mortgage offerings, with terms ranging from one to ten years and amortizations from five to up to 30 years. A second mortgage is also offered, with up to 95% loan-to-value for purchasing a secondary residence, and 80% LTV for refinancing.
First National Financial was the second MFC in Canada and is now Canada’s largest. When it’s time to renew, First National makes it easy by simplifying it into three steps: review, sign, and submit it electronically. Alternative mortgage solutions are offered through the Excalibur program to those with a bad credit score or for those who are self-employed. The Excalibur program is only available in Ontario.
Reality Financial Advisors recently acquired Street Capital in 2019. Besides mortgages, RFA also offers guaranteed investment certificates (GICs). As a member of the Canadian Deposit Insurance Corporation (CDIC), RFA GICs are eligible for deposit insurance for up to $100,000.
MERIX Financial, also known as Paradigm Quest, provides services to those with a bad credit score, untraditional income sources, or for those who are self-employed, through their uninsured non-prime NPX mortgage. NPX permits a credit score as low as 500, however, terms are up to only three years. The MAX mortgage is offered for those who do not traditionally qualify under stress-testing scenarios. MERIX also offers a wide range of products, such as Interest-Only payment mortgages, Bridge Financing between the sale and purchase of a home, and Adjustable Rate Mortgages.
As of October 2020, MERIX’s 5-year fixed mortgage rate was as low as 1.84%.
Radius Financial requires a minimum credit score of 620 on their standard mortgage, with at least two years of credit history.
As of October 2020, Radius Financial’s current 5-year fixed mortgagerate was as low as 1.89%. The rate for uninsured conventional purchases and refinances was 5.09%, while the rate for new immigrants and non-permanent residents was 5.04%.
Canadian Mortgage Loan Services Limited (CMLS) is one of Canada’s largest commercial mortgage lenders but is also a big player in residential mortgages.
As of October 2020, CMLS' 5-year fixed mortgage rate was as low as 2.19%.
Home Trust’s 5-year fixed mortgage rate as of October 2020 was posted at 4.79%.
Approaching numerous mortgage lenders directly can be daunting, especially when you are trying to find the best mortgage rate. Mortgage brokers can help simplify the process by negotiating on your behalf for the best rates at numerous brokers.
Mortgage brokers can help you determine the best type of mortgage for you, based on your own personal situation. They will then go over various options from numerous lenders and submit documents on your behalf, helping to simplify the process. This can include the mortgage broker negotiating on rates and terms. Mortgage agents work for mortgage brokerages and largely carry out the same duties. Both mortgage brokers and mortgage agents are licensed provincially.
Be aware that a mortgage broker does not necessarily make it easier to get approved for a mortgage. All mortgages from federally-regulated banks are required to undergo a mortgage stress test, even if you make a downpayment greater than 20%.
The mortgage stress test can be avoided by going to provincially-regulated financial institutions, such as credit unions, where there is more flexibility in the results of the stress test. B lenders and private lenders are also not required to conduct a stress test.
Why use a mortgage broker? Some lenders may not deal with consumers directly and may require you to deal with a mortgage broker. Mortgage brokers can help you find the best deal and product that suits you by searching through a large network of lenders, including the Big Banks, B Lenders, and private lenders. However, some mortgage brokers may work with a limited number of lenders or with just a certain lender. Mortgage brokers may be required to disclose to their clients the relationships that they have with lenders.
Mortgage brokers get paid a fee for their services. Mortgage brokers may be compensated directly by their referring lender through a commission, such as a finder’s fee, or they may charge their client directly. For example, Radius Financial’s mortgage broker commission is 1.30% on 5-year fixed mortgages. The commission on a 1-year fixed mortgage is as low as 0.40%.
Mortgage brokers must disclose to their clients if they receive a commission or any compensation from their referring lender, as well as the amount they will receive. In Ontario, mortgage brokers cannot require you to pre-pay fees before you sign your finalized mortgage agreement if the mortgage is under $400,000.
Selecting a mortgage broker can be tricky, so be prepared with some test questions to ask and be sure to check out the mortgage broker’s reviews. While mortgage brokers should look after your best interests, commission and compensation from referrals may introduce bias. Always ask a mortgage broker if they charge a fee, what services they provide, and how many lenders they work with, before contracting their services.
A few common mortgage brokerages include Dominion Lending Centres, True North Mortgage, CanWise, Butler Mortgage, intelliMortgage, Vantage Mortgage Group, Mortgage Architects, and The Mortgage Professionals.