Let’s first understand the difference between different classes of mortgages in Canada:
As mortgage professionals, we refer to the 3 major tiers of lending as: A-lender mortgage (or ‘A’ bank mortgage), B-lender mortgage (or Alternative Mortgage), and private lender mortgage. If this terminology sounds familiar, it’s because these terms have become quite mainstream, even beyond industry professionals. Over many decades, the Mortgage landscape has transformed beyond the typical ‘Bank Only’ lending solutions to include alternative mortgage options. These alternative mortgage financing solutions appeal to those borrowers who often require more flexible consideration to fulfill their mortgage financing needs, be it a purchase, a refinance, or an equity takeout.
In simple terms:
A lender mortgage (or Bank mortgage): Refers to any mortgage funded through traditional lending sources (i.e., major banks or tier-A broker channel banks) – What comes to mind might be – the best mortgage rates, longer-term options, slightly lower affordability, and stricter approval guidelines.
B lender mortgage: Refers to any mortgage funded through non-traditional banks (i.e. Trust companies, B Lenders, Monoline Lenders & Credit Unions) – What comes to mind might be a common sense lending approach, higher affordability, and flexibility in the types of income used. Rates are reasonably priced in consideration of the flexibility that is offered, but they are higher than the traditional banks.
Private lender mortgage: Refers to mortgages funded outside of lending institutions (i.e., Private Equity, Mortgage Investment Corporation (MIC), numbered company/registered corporation, or individual lenders) – Often referred to as ‘Equity Lenders’, private lenders are mostly interested in the available equity in a home necessary to secure their mortgage and less interested in the qualification used by banks. Rates are considerably higher but offer the greatest level of flexibility with the least amount of “red tape”. When needed, private mortgage solutions are the path of least resistance with a very quick funding turnaround – but they need to be used strategically.
Pros and Cons of a ‘B lender mortgage’:
The benefits of a B Lender Mortgage can vary from one borrower to another. To keep things simple, we’ll limit the pros and cons of a B lender mortgage to 3 major points for each.
Pros:
- A ‘B lender mortgage’ offers a clear solution for clients who do not qualify through traditional banks for reasons such as nature of income, high debt servicing ratios (affordability), previous mortgage arrears, poor/blemished credit, past bankruptcies or consumer proposals, non-traditional down payment sources, etc.
- A ‘B lender mortgage’ is typically funded on 1-to-3-year terms (rather than traditional 5-year bank terms) offering the borrower future flexibility to improve their circumstances and easily transition back to traditional lending sources, without large penalties.
- B lender mortgages are less stringent on qualification guidelines and allow much more leniency on; debt servicing ratios (thus allowing higher mortgage affordability), less than perfect credit scores, non-conforming sources of income (ex. Business-for-self, commission, bonus, part-time or contract employees) and varying down payment sources. They are also more advantageous in the method they use to qualify rental property income.
Cons:
- It’s no secret that a B lender mortgage comes with a higher price tag in 2 ways: Interest rate and mortgage closing costs. Given that these options are often short-mid term solutions that serve an immediate mortgage financing need, the trade-off can be considered ‘worth it’.
- A ‘B lender mortgage’ often requires a property appraisal for all mortgages (regardless of purchase or refinance) whereas A lender mortgages do not (or at least do not 50-60% of the time). We wouldn’t refer to this explicitly as a con… but it is an added cost of closing. It’s worth mentioning that the cost of an appraisal is often towered by every other cost associated with closing on a home. As a bonus, homeowners like to get reassured that the home they are buying is actually worth what they were willing to pay. (Note: Since home prices have grown so much in such a short period, we find that A lender mortgages are requiring appraisals more often than in previous years – making this less of a con than it once was).
- A ‘B lender mortgage requires a minimum down payment of 20%. For refinances, this often isn’t a hurdle for borrowers. However, for purchases, it can easily affect buyers drastically if the buyers budgeted for only the minimum down payment requirements of 5%, 10%, or even 15%. Considering that average home prices in major cities across the province have approached uninsurable territory over the last 2 years… a 20% down payment might be necessary across all tiers. This too makes this point less of a con than in the years prior.
Note: The final quarter of 2023 and 1st quarter of 2024 is expected to see stability in home prices. While we might see a further decline in prices if demand drops further, there has already been up to a 20% decline from peak to trough.
You might have noticed that, unlike A lenders who advertise their insured mortgage rates, B lenders do not typically publish their mortgage rates to the public, and this is primarily done for the following reason: B lender mortgages take a tailored approach to your application. They consider unique situations surrounding the borrower’s circumstances to provide the most reasonable mortgage that they can offer. As such, there is no ‘one rate fits all’ with B lenders.
If you’re worried about getting the best B lender mortgage rates – don’t worry – we’re incentivized to get you the best mortgage rates with the most reputable B lenders in the space. We’ve been working with these lenders long enough to know exactly how they price your application, so let’s chat and we’ll walk through your options together – (905) 455-5005.