The Truth about Alternative Mortgage Lenders

Some members of the media have gone overboard painting a dark and dour picture of alternative lenders. The impression we are given is that a bank mortgage is lily-white-extra-virgin-be-all-and-end-all, and anything else is inferior — and perhaps unsavoury.

We hear terms like shadow lending, sub-prime lending, private lending, alternative lending, etc., and it’s not hard to find an industry insider who will happily provide a spooky sound bite.

For example, a recent article in The Toronto Star, talking about declining real estate values in Toronto, took a shot at alternative lenders stating:

“The problem has been compounded by new mortgage rules that they believe have the potential to drive desperate buyers deeper in debt by sending them to alternative lenders that offer higher-interest loans.”

That’s kinda silly really; and just plain wrong.

If a mortgage applicant is a strong alternative mortgage candidate, she will be offered a rate as low as 3.54% to 3.79%. That is HARDLY driving her deeper into debt and in fact is competitive with current “A lender” rates.

I will break it down for you. For most residential mortgage needs, there are just three types of lenders.

There are “A” lenders, private lenders and alternative lenders.

“A” Lenders

Chartered Banks, Credit Unions, Monoline Mortgage Lenders

If you can fit into an “A” lender’s lending guidelines, you happily do so. You will normally enjoy the lowest interest rates and usually no fees associated with the mortgage, unless it’s high ratio — in which case you pay the CMHC insurance premium. Here’s an article where I explain hi-ratio and loan to value.

Within the group of “A” lenders there are three primary types:

  1. CHARTERED BANKS: they know who you are; their approval process seems less demanding. But they do have to comply with the new mortgage stress guidelines, and they don’t often have solutions for self employed business people.A particular concern; their prepayment penalties are typically very high. Which matters when so many five year mortgages never actually make it to full term.
  2. CREDIT UNIONS: same benefits as the chartered banks, and a couple more. They don’t yet have to use the stress test when underwriting non insured mortgages AND they are very practical when it comes to commissioned sales people and other self employed folks.
  3. MONOLINE MORTGAGE LENDERS: unlike banks and credit unions who have many different credit and loan products, these lenders only focus on mortgages — hence MONOLINE (mono means one in Latin).

They will not service you with bricks and mortar branches — your dealings will all be phone, fax and online.

They also must use the mortgage stress test for all their mortgage offerings. One big advantage of monoline lenders is their prepayment penalty to break a fixed rate mortgage is usually much less than the banks and credit unions.

Examples of monoline lenders include Merix, First National Financial, MCAP, and RMG Mortgages

There are also some trust companies and insurance company spin-offs offering mortgage products.

Private Lenders

At the other end of the spectrum, there are mortgage investment companies and even wealthy individuals who are willing to lend their money when no one else will.

They serve a valuable and necessary role in the marketplace. They will typically have the highest interest rates and fees, but they will often solve insoluble problems. They do not offer high-ratio insured mortgage solutions.

Private lenders care mostly about your property, since if you renege on the loan and they have to commence power of sale processes, they want to know they can get their money out quickly.

Some of the biggest names in this space in Canada are Fisgard Capital Corporation, Alta West Capital, and VWR Capital Corp. But you could even get a private mortgage from your lawyer, your neighbour, your real estate agent, a family member, your mortgage broker — in fact anyone who is willing to take the risk.

If you find yourself in private mortgage discussions, make sure you retain an experienced real estate lawyer and a reputable mortgage broker who is licensed and held to regulatory standards by The Financial Services Commission of Ontario (FSCO – or the equivalent to FSCO in your province)

Alternative Lenders

Also called “B” Lenders

When your mortgage needs are not quite ready for prime time – “A” lender territory – and your covenant is so strong that a private mortgage is not necessary.

These lenders are not offering you high-ratio, insured mortgages. So whether you are purchasing or refinancing your property, you will need at least 20% down payment.

These are companies like B2B Bank, XMC Mortgage Corporation, Equitable Bank, Home Trust Company, Lendwise NPX, Street Capital Solutions, Optimum Mortgages, MCAP Eclipse, RMG Eclipse, Bridgewater Bank, Effort Trust, IC Savings, First National Excalibar, and Community Trust.

Most of these lenders in fact have mortgage products catering to “A type” clients too. They are all reputable companies doing business with integrity. They are regulated and they are good. In fact, the alternative mortgage sector is the fastest growing segment of the Canadian Mortgage Industry.

Private lenders and alternative lenders do not lend in every province; your mortgage broker will match up your application to the most suitable lenders.

Alternative lenders will usually charge you a one-time lender fee, and their rates can be a touch higher than “A” lender interest rates. They are sourced by a mortgage broker, and s/he may charge you a one-time brokerage fee.

Other characteristics of an alternative mortgage offer:

  • The term offered will usually be one or two years, occasionally three years
  • Thirty year amortizations are normal and in fact a couple will allow 35 years with a modest rate increase
  • They are much more open-minded about non-conventional income sources
  • They are willing to work with people with blemished personal credit histories
  • They also must apply the mortgage stress test when underwriting your mortgage, BUT they will work with higher debt service ratios than the A lenders will; it’s not uncommon to go up to 48% or even 50% Total Debt Service Ratio. (TDS)
  • Most of them like to collect your property taxes with your mortgage payment
  • Most of them charge a modest renewal fee, and some charge an annual maintenance or administration fee (a few hundred dollars)

FIVE EXAMPLES OF ALTERNATIVE MORTGAGE CLIENT SITUATIONS
  1. A recent bankruptcy, consumer proposal or debt restructuring
  2. Recent history of late payments and low personal credit score
  3. A judgment or lien registered against their home
  4. Hard to verify income — for example contractors, salon workers, consultants, commission income, truck drivers, etc.
  5. Look like “A lender” clients, but their income is not high enough to qualify with the mortgage stress test

There are even lenders who specialize in agriculturally zoned properties; construction financing and blanket mortgages (a mortgage covering more than one property).

Also, both Equitable Bank and Home Trust Company offer HELOC/Visa type products which are terrific for clients who need a secured line of credit but do not qualify via conventional means.

Closing thoughts

There are mostly good honest people working to help you mortgage your home; whether you are dealing with “A” lenders, private or alternative lenders. In any business there are a few bad apples.

Ask lots of questions, feel free to get a second opinion, and rely heavily on an experienced real estate lawyer.

If you are being presented with a private or alternative mortgage solution, ensure your mortgage broker has experience and comfort in this arena — not all do. And ask if this is a temporary phase you are going through or if this is in fact the world you now live in.

Ask for an estimate of the total cost of the solution your broker is sourcing for you. There should not be any last minute surprises when the final offer comes in. Understand how much you must pay and when, and whether or not expenses are coming from your pocket or from the mortgage proceeds.

Assess the costs and benefits of any mortgage solution and if the costs seem high, ask why, and try to determine if there is a path towards cheaper mortgage financing in the future.

In other words ask as many questions as you need until you feel satisfied and fully aware of the process!

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