B Lender Mortgages in Canada

B Lenders are financial institutions that provide mortgage loans to borrowers with less-than-perfect credit or financial history. These may include those with unconventional income sources, who are new to Canada, or who have higher levels of debt. B lenders are sometimes referred to as “subprime” or alternative mortgage lenders, in contrast to “A lenders,” which are for prime borrowers.

Financial institutions that are B Lenders include mortgage companies, sometimes called monoline lenders, such as Mortgage Finance Companies (MFCs). B Lender mortgages are often for shorter terms, ranging from 1 year to 3 years, with usually a minimum down payment requirement of 20%, and are meant as a stepping stone for borrowers to improve their financial situation and eventually qualify for an A lender mortgage with better rates and terms. A mortgage broker can help assess your situation and connect you with B lenders.

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A Lenders include chartered banks and credit unions. A Lenders lend to prime borrowers, which are borrowers with a good credit score and history, as well as a stable income. For example, prime borrowers would have a credit score above 700 and a low debt service ratio. They may also be eligible for mortgage default insurance by meeting CMHC rules, such as a maximum home purchase price of $1 million ($1.5 million from December 15, 2024), a maximum gross debt service ratio of 39%, and a maximum total debt service ratio of 44%. These borrowers will receive the lowest mortgage rates available.

Most Canadian mortgages are lent through Canada's Big Six Banks: RBC, TD, Scotiabank, BMO, CIBC, and National Bank. RBC mortgages made up 21.7% of Canada’s $2 trillion mortgage market in Q2 2024, making the Royal Bank of Canada the largest mortgage lender in the country. These “A Lenders,” along with other chartered banks, have relatively strict criteria for prospective mortgage applicants.

Who can you turn to if these A Lenders turn you down? The answer is B Lenders, as they offer an alternative to the big banks. Many B Lenders specialize in providing mortgages to borrowers with bad credit scores or low incomes, although they come with higher mortgage rates and may have additional lender fees. It’s common for B Lenders to charge a 1% lender fee on the mortgage amount. Some A Lenders also offer some Alt-A and B Lender products.

People choose to work with B lenders when they cannot secure a mortgage from an A lender due to their credit or financial situation. B lenders offer an alternative option for those who may not meet the strict criteria of traditional banks but still need access to financing. Some common reasons why a borrower may turn to B lenders include:

• Poor Credit: Alt-A borrowers have a credit score between 600 and 700, while bad credit borrowers have a poor credit score of less than 600. Having a credit score of less than 700 can make it difficult to secure a mortgage from an A lender, so B lenders are a better option for those with a lower credit score.
• Alternative Income Sources: Business owners or self-employed individuals often have non-traditional income sources that may not meet the strict requirements of A lenders. 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. B lenders may be more willing to consider this type of income when evaluating a mortgage application. Non-traditional income earners can include real estate investors who wish to use their rental income to support their mortgage applications.
• Relaxed Requirements: Some B Lenders allow you to skip the mortgage stress test or allow higher debt service ratios. For example, A Lenders typically allow a maximum gross debt service (GDS) ratio of 39% and a maximum total debt service (TDS) ratio of 44%. In comparison, the alternative extended ratio product from Equitable Bank allows a maximum GDS and TDS of 60% in select areas. This means borrowers can qualify for a larger mortgage or have a higher debt load with a B Lender.
• Income History: Applicants may be required to show two years of tax returns to prove their income. Those with less than two years of history might find it harder to qualify for a mortgage from an A Lender.
• Previous Financial Challenges: If someone has recently experienced financial challenges, such as bankruptcy or foreclosure, they may find it difficult to get approved for a mortgage from an A lender for at least two years after discharge. In these cases, a B lender may be their best option.

B Lenders have become increasingly common over the years. In fact, the four major Mortgage Finance Companies (MFCs), MCAP, First National, Merix, and RFA, collectively accounted for 12% of all outstanding mortgages in Canada in 2015, according to the Bank of Canada. That is compared to a share of less than 2% in 2001. Some other examples of Alt-A and B Lenders in Canada include Equitable Bank, Bridgewater Bank, and Community Trust.

The size of B lenders and alternative mortgage lenders has also ballooned. According to Statistics Canada, in 2010, the collective total financial assets of mortgage finance corporations (MFCs) and mortgage investment corporations (MICs) were less than $15 billion. By 2022, that had grown to well over $100 billion. This shows that more and more Canadians are turning to alternative lenders for their borrowing needs.

Aside from B lenders, the other alternative financing option available to subprime mortgage borrowers who may not qualify for traditional bank loans is private mortgage lenders. Private lenders pool together funds from investors to fund mortgages, which means that they can be more flexible in their lending criteria compared to banks. However, private mortgages also come with higher interest rates and fees compared with B lenders.