Alternative Mortgage Lenders: Afford Up to 50% More Mortgage
Since the introduction of the 2016 mortgage stress test (which determines whether or not you can afford the mortgage you want), traditional big bank lenders are consistently rejecting more mortgage applications. Thanks to the rise of Alternative Lenders the $600,000 home your bank said was the most you could afford can now be a $900,000 home you need for their growing families and physical distancing precautions. Currently, with an Alternative or Private Lender, you can now afford 50% more mortgage at rates that big banks were offering last year due to the rate wars that COVID-19 has brought to the forefront.
Those who have bruised credit, are self-employed, have side hustles, collect rental income, or have any other forms of non-traditional income tend to among those who most need Alternative Lenders. If you fall into one of these categories, don’t be discouraged. If your mortgage application gets rejected by a traditional lender (also referred to as A-Lenders or Prime Lenders), there are still ways to get the green light for mortgage approval and become a happy homeowner. If you’re eager to get into the housing market right now or need to ensure you have a mortgage before a pre-sale completes, your best option could go through private or alternative mortgage lenders. So, how do private and alternative mortgage lenders work in Canada, and which one is right for you? Let’s dive into the nitty-gritty and find out.
How Alternative “B” Lenders Work
One of the reasons some people may not first consider going through an alternative or private lender is due to paying higher interest rates than what traditional banks offer. However, there’s good news on this front. Nearly 15% of mortgages in Canada are now through alternative lenders, which means they’ve needed to keep their interest rates lower to stay competitive.
KEY BENEFITS:
More flexible with allowing you to afford up to 50% more mortgage.
Do not need as much paperwork from you.
Are willing to accept only 6 months of bank statements vs. two years of T4’s/T1’s.
Can accept forms of income that traditional “A” or “Prime” lenders won’t count as legitimate.
Can accommodate bruised credit scores (below 600).
DOWNFALLS:
It can be a little more expensive, with a typical interest rate being .50%-1.00% more than a bank
They charge a one-time, one percent fee on your mortgage upon approval (amongst other smaller costs).
In a normal market, Alternative Lenders usually charge 2.54% to 5% interest, while Prime lenders charge between 2% to 3% percent (give or take 0.25%). To put this into perspective, let’s take a look at the dollar value difference this would make on a $500,000 mortgage on just a one-year term.
On a $500,000 mortgage with an amortization of 25 years, the difference between a 2.99% rate (with a Prime lender) and a 3.99% rate (with an Alternative Lender) is $3168 total dollars, which equals only $264 more per month. Although Alternative Lenders also apply the mortgage stress test, their TDS debt servicing ratio can be ten percent higher (and sometimes twenty percent) than traditional lenders. This means that if your monthly mortgage and recurring debt was $3000, you’d only need to prove roughly $6000 per month of income to qualify— compared to $6818 per month that traditional lenders would want to see.
Speaking of income, Alternative Lenders will often count alternative forms of income, such as Airbnb or rental property income, sales commissions, or even tips at a bartending or restaurant side-gig. These are all very real sources of income for entrepreneurs, which traditional banks aren't convinced are 100% steady (and therefore, usually decline).
It’s important to note that Alternative Lenders charge a one-time, one percent fee on your mortgage total. Mortgage brokers will usually charge a 0.5 to one percent fee for their work since lenders compensate them very little on alternative deals. You can usually sign on for one to three-year terms to start and are subject to a $500 or so renewal fee if you choose to renew after your contract term. The alternative options are to find a different Alternative Lender with a lower interest rate, or, if the difference is substantial, create an exit plan with your mortgage broker to qualify with a Prime Lender.
How Private “C” Lenders Work
KEY BENEFITS:
An option for those who don’t qualify for Alternative Lending.
You can get approved in 24-hours and access capital quickly for timely real estate investments.
Offer interest-only loans.
Shorter terms: a three month to three-year maximum loan.
DOWNFALLS:
Considerably higher interest rate than Prime or Alternative Lenders, which ranges between 5.99 to 9.99+ percent.
Require a minimum 20-25 percent down payment.
One time upfront fee of one to 1.5% percent upon mortgage approval (and an extra one percent fee from the mortgage broker, as Private Lenders don’t pay mortgage brokers).
For those who cannot qualify with Alternative Lenders because their debt is too big of a percentage of their income or their credit score is too low, Private Lenders are an option and offer interest-only loans.
What is an Interest-Only Loan?
Most Private Lenders want to see a minimum 20-25% down payment and ensure that the property you are living in is highly marketable and suitable for them to collateralize, if necessary.
Private Lenders operate with interest-only loans because they are intended to be short- term loans, with the expectation that you’ll have an exit strategy and plan in place to obtain a more favorable loan (with Alternative or Prime Lending in the next few months to three years). Be sure to always consult your mortgage broker on the best strategy to exit from Private Lending into Prime or Alternative Lending.
Similar to Alternative Lenders, you will also need to pay a one-time fee of at least one to 1.5 percent fee, in addition to another one percent fee from your mortgage broker (as Private Lenders never pay mortgage brokers). Do note that in many cases, the lender fees can be upwards of three percent.
Conclusion: Is it Better to Continue Renting or to Buy with an Alternative Lender?
So, should you wait it out and keep renting or work with an Alternative or Private lender?
Although it can be uncomfortable knowing you’re paying higher interest rates than you would be with prime lenders, it can also be uncomfortable to keep renting. In this case, you’d want to ask yourself the following questions to consider the opportunity cost and intangibles of waiting.
Question One: Am I willing to pay ~$3000-$5000 extra this year plus my upfront fee to ensure I own a place today?
Question Two: Am I willing to pay $30,000 in rent for a year if I am not ok with paying a higher interest rate on a mortgage today? This assumes a conservative $2500 rent for a two-bedroom apartment.
Question Three: Do I think a house like this will appreciate more than the extra fee I am paying today?
Question Four: Do I want to want to risk mortgage interest rates going up in the future?
Video Case Study:
Learn how Alternative and Private Lenders work, with this real video case study of a young couple obtaining a mortgage through an Alternative Lender. You will learn how they were able to reduce their monthly payments from $3500 to $2100, and how you can do the same. We’ll also weigh out opportunity costs of paying more for a mortgage today, versus paying much less two years from now, so that you can learn how to be discerning in today’s buyers market.