The majority of homeowners are blissfully unaware of alternative mortgages. They presume everyone is entitled to sub-3% mortgage interest rates, with no fees of any kind.
But there is a growing, significant percentage of borrowers who need a different type of mortgage financing solution. Sometimes there is no choice, which is why the alternative lending market (B-lenders) is so important to the overall health of the mortgage industry and, indeed, our economy.
Could this happen to you? Who would you turn to if your bank turned you down for a mortgage? How would you know if you are being given the straight goods, or being sold a bunch of baloney?
If your primary financial institution (bank, credit union, trust company) refuses you a mortgage, you need to source a mortgage broker who can explore alternative financing options for you—hopefully with a B-lender solution. And if that doesn’t work out, then there are many potential private mortgage lenders too.
Most mortgage brokers are very comfortable working with A-lenders like banks, credit unions and monoline lenders, such as MCAP and First National. And, in recent years, a growing number have expanded their businesses to provide alternative and private lending solutions. Be sure to select a professional who is experienced with these types of specialized products when you are in the market for a non-traditional mortgage.
Mortgage brokers have access to a fair number of alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based lenders, including:
- Expanded debt-service ratios—some alternative lenders will allow GDS and TDS ratios as high as 50%, and are not constrained by 35/42 or 39/44 ratios, as traditional lenders usually are. In fact, if the loan-to-value ratio is low, they can get really creative. (For example, Haventree Bank may consider up to 60/60 debt service ratios when the LTV is under 65%, under their non-conforming product).
- Tolerant of damaged credit histories—they will reserve their lowest rates for those with high credit scores (720 and above, sometimes less) but at the same time may entertain your mortgage application with a score as low as 500 or even lower.
- Receptive to forms of income that traditional lenders cannot consider, such as Air BnB income, commission income, tips and contributory income from spouses not even on title. And most are more relaxed in their approach to self-employed borrowers.
Suppose for you the door is closed to banks and all A-lenders. How did you get here? Reasons typically include one or more of the following:
- Cannot pass the mortgage stress test: inability to meet maximum debt-service ratios.
- Low credit scores: could be too many late payments, balances too high on credit facilities, collections and liens, or even a consumer proposal or bankruptcy.
- Non-traditional income: could be commissioned or rely on tips and work in a cash-based business. May even be irregular part-time income. Or perhaps you rent out rooms in your home, or have Air BnB income, foster care income, disability income, child tax benefits, etc. Do you buy, renovate and sell houses, and the capital gains are your only income? You could even own “too many properties.” (Yes, that can be a thing!)
- Self-employed: you could be a business owner with lots of expense deductions and low reported taxable income. Or maybe you have been self-employed only a short time—fewer than the two years A-lenders prefer to see.
How long will it take to graduate back to A-lending?
The length of time you remain in an alternative lending product will vary based on your unique situation; most alternative mortgages are offered as one- or two-year terms. There are some lenders who offer three- and even five-year terms, but this is much rarer.
There are some borrowers who remain in this space for the long haul. It is unlikely they will ever qualify for a mortgage with an A-lender because of credit and/or income issues and that’s ok. They are grateful there is a reasonable cost alternative.
What added costs come with alternative mortgages?
Your interest rate will be a bit higher than those offered by an A-lender. These days, they mostly range from 3.99% to 5.99%. I don’t have the stats, but it feels like a large percentage of these are in the narrower range of 4.24% to 5.24%.
And the lowest rates are typically for a one-year term, with the two-year term coming in a touch higher.
Here are some sample payments to illustrate the impact of different mortgage rates. The difference is not as much as people expect.
- $300,000 at 2.99% with a 30-year amortization = monthly payments of $1,260
- $300,000 at 3.99% with a 30-year amortization = monthly payments of $1,425
- $300,000 at 4.99% with a 30-year amortization = monthly payments of $1,600
Most of the time, your lender will charge a one-time fee of 1% of the loan amount.
With mortgages arranged with A-lenders, your mortgage broker is paid by the lender at no extra cost to you. This is less the case with alternative mortgages, mainly because the shorter the mortgage term, the less the compensation, yet the workload is at least the same and often more intense.
Therefore, when sourcing an alternative mortgage for you, your mortgage broker will often charge a brokerage fee. They should be upfront about this exact charge early on in the process. The amount varies from broker to broker and from loan to loan. Factors brokers consider are:
- The complexity and level of effort they anticipate is involved to fund your mortgage.
- The size of your mortgage. The smaller your mortgage, the larger the fee may seem as a percentage of the loan amount, and the larger the mortgage, potentially the smaller the fee may seem as a percentage of the loan amount.
If you are buying a property, lender and brokerage fees come from your pocket. If you are refinancing, they are deducted from the mortgage advance, if there is enough equity to do so.
All fees and costs must be disclosed properly to you according to your provincial regulator’s rules. Lender and broker fees are paid on your funding date.
As with most mortgages, you can expect to pay for an appraisal, solicitor and title insurance.
Some lenders charge annual administration or “maintenance” fees of a few hundred dollars, and they typically charge a renewal fee if you accept one of their renewal offers. There is not a one-size-fits-all formula applied when calculating renewal fees.
Monthly property tax administration fees can also be charged (less than $5 per month).
Alternative lenders are a safe route
In the Q1 broker lender market share figures, alternative lenders Home Trust Company and Equitable Bank together held more than 13% of broker market share.
Alternative lenders are not to be feared or disparaged. They serve a very useful role in the mortgage industry and are a terrific midpoint between a bank-issued mortgage and a private lender solution.
When a mortgage borrower does not even fit into the world of alternative lenders, your mortgage broker will need to source a private mortgage solution for you. I will explore this option in future articles.