Quick Answer
A B-lender is an alternative lender for people the big banks turn down. Maybe your credit took a hit, you’re self-employed, or your debt ratios run a little high. B-lenders are more flexible, and they’ll approve deals the banks won’t. The catch is cost. You’ll usually pay a rate that starts about 0.5% to 1% higher than the best bank rates, a lender fee of about 1%, and a reasonable brokerage fee on top. Terms tend to be shorter too, often a year or two. For most people it’s a stepping stone. You get financed now, sort out the issue, then move to a bank at renewal.
Key Takeaways
- B-lenders are for flexible approvals: bruised credit, self-employment, or higher debt ratios.
- Rates start modestly higher: usually about 0.5% to 1% above the best bank rates, and up from there.
- Expect two fees: roughly 1% to the B-lender, plus a reasonable brokerage fee, because B-lenders don’t pay brokers the way banks do.
- It’s usually a bridge: a short term to get financed now and move to a bank at renewal.
- If a B-lender is a stretch: a privately funded mortgage can be a short-term option, then you refinance once things stabilize.
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.
Frequently Asked Questions
Are B-lenders legit?
Yes. They’re regulated companies like trust companies, monolines, and credit unions, not some private lender working out of a basement. They just help people who don’t fit the banks’ narrow box.
How much more does a B-lender cost?
Rates usually start around 0.5% to 1% above the best bank rates and move up from there depending on your situation, plus two fees: about 1% to the B-lender, and a reasonable brokerage fee to us. Where you land overall comes down to your credit, your income, and the property.
Why is there a broker fee on a B-lender deal?
Fair question. On a prime deal the bank pays us, so you usually don’t see a separate broker fee. B-lenders don’t pay brokers the same way, so a reasonable brokerage fee covers the work of finding the right lender and structuring your file. It’s just how that side of the market works, and we’ll always lay it out for you before you commit.
Can I move back to a bank later?
That’s usually the whole point. After a year or two of rebuilding, most people refinance to a bank and a better rate. We map out that exit before you ever sign with a B-lender.
Got questions about your options? Contact us today or call 905-455-5005. No pressure, no obligation.