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When the time comes for you to get a mortgage, where will you go? The traditional answer to this question has always been one of Canada’s big six banks. With the introduction of stricter lending rules, one-in-five mortgage applications are now denied by the banks.

So, is the traditional answer still the right one?

Regulations

The biggest change to mortgaging regulations in recent years has been stress testing. The stated purpose for introducing stress testing is to protect consumers and improve mortgage quality. It does this by setting the threshold for paying higher than it would be in the actual mortgage. This is to simulate what might happen to the base rate over the lifetime of the loan. Stress testing ensures that borrowers can pay more if needed. Setting the mortgage quality higher also keeps out people who could pay.

This also impacts on borrowers seeking a second mortgage for repairs/improvements. A second mortgage is often needed for a short period of time. In this case, stress testing creates an unrealistic model for the loan. The aim of better-quality mortgages impacts borrowers who intend on short-term repayment.

Beyond stress testing, banks often include their own set of metrics to test borrowers. This can involve deep dives into your financial history. The detailed examination of your potential future earnings. They may also need a detailed account of your holdings.

This further disenfranchises potential borrowers. Ontario, like Canada as a whole, has a rising number of self-employed members of the workforce. Borrowers in this situation may not have a monthly dependable income. Rather, they have bursts of income that they need to manage. Strict lending rules make it difficult for them to borrow money. 

Over the last few years, there have been some changes to how the big banks lend. Newer products are replacing income verification with a greater down payment. Some financial products in Ontario go as high as 35-40% for a down payment. You also need to have a high credit score. There’s also a premium to pay to account for less interest collected by the bank. It may be a different product for the banks, but it’s the same old attitude. 

Alternatives

There needs to be limits and regulations around borrowing. But the banking system is shutting out borrowers with the ability to pay. What are the alternative options for them? For anyone seeking the best possible arrangements for their mortgage?

Canada has an alternative lending market that is among the best in the world.

Alternative lenders - or so-called B-Class lenders - are lenders other than banks. They can be businesses that specialize in loans or co-operative setups like a credit union. While others are investment focused groups who deal in specialized mortgaging.

In 2019 almost a third of Canadian borrowers took their business to an alternative lender. Between 2007 and 2018 the total value of mortgages not issued by banks grew by over 900%. This increase has been driven by restrictions in regulations since the financial crash. Those alternative borrowers that do step beyond the banks, find it to be a rewarding experience.

Alternative borrowers do their homework beforehand. Most reported assessing 3 or more lenders before applying. After application, 86% of borrowers received their funds within 72 hours. The majority of borrowers rated themselves satisfied or very satisfied with their experience. Crucially, more than half of borrowers wouldn’t go back to traditional lending or are now unsure about it.

There is a growing number of potential borrowers locked out by stricter regulations. The alternative lending market has grown for over a decade. The experience borrowers have is overwhelmingly positive.

Taking an Alternative Route

As with traditional borrowing, alternative borrowing requires preparation and expertise. You might attend meetings with banks, talk to their experts, and read their documents. But you’re not getting the full picture.

The financial experts that work at the banks are salespeople. They will sell you the product they have, whether it’s right for you or not. Something we never do. The financial experts at Canadalend.com are independent. We don’t incentivize them to sell you a specific product because it’s better for us. Instead, they help you find the product that’s right for you and the alternative lender that can provide it.

If you contact Canadalend.com today we can help you. We’re experts in finding alternative lenders that can help you achieve your goals.

In Canada, two credit bureaus are responsible for calculating credit scores. Equifax and TransUnion issue scores between 300 and 900 as a way for lenders to assess borrowers. As a general rule, 650+ is what a lender likes to see from a potential borrower. Anything below 600 is a concern for lenders and may limit a borrower’s options.

Credit scores are a mix of your current situation and your past behavior, such as missed payments. A critical factor in determining credit scores is debt. The Bank of Canada notes that Canadian household debt has been growing for thirty years. Average household debt now stands at 170% of household income.

A bad credit score can develop to the point where you can no longer get help to fix the problem. More households are carrying credit score damaging debt, and more are denied assistance.

So, what can citizens do if they need to borrow money but have a bad credit score?

Alternative Lending

Credit scores are essential across the financial industry. Yet, different lenders emphasize it differently.

The big six Canadian banks rate credit score as a significant factor in the approval for loans - this is partly business preference, and partly national legislation. The main problem with this approach is that it doesn’t focus on the main criteria for a loan. Can a borrower afford it with their current financial setup?

The problem can be even more acute for some borrowers - borrowers who are seeking a second mortgage, for example. The most common reasons for a second mortgage are to pay off outstanding bills and pre-sale home improvement. In both these instances, the borrower is going to be better off in the short term than they are today. Lending to them should focus on that and their ability to pay.

A citizen may have a period in their life where they have been financially irresponsible. So, they need to get a loan to merge and manage their debts. They will likely be turned away by the banks and left to face bankruptcy - this is where alternative lenders have made their mark. Ranking borrowers on their potential to pay means they can work with people no longer supported by the mainstream.

Alternative lending has seen consistent growth over the last ten years. Strict regulations and emphasis on credit scores are forcing lenders from the mainstream. What they find with alternative lenders is an emphasis on the role the loan will play in the borrower’s life.

Alternative Lenders

Besides offering services the big banks don’t, alternative lenders compete with them. Many alternative lenders are specialized businesses whose trade is lending. They fight for customers of all types and have a range of products that most banks do not.

With searching, borrowers can find better deals with alternate lenders than the mainstream. Recent surveys show that satisfaction with alternative lending is leading to permanent change. More than half of those approved for alternative loans said they would be unlikely to return to the mainstream.

Alternative lenders offer borrowers a way to improve their financial situation.

Taking an Alternative Approach

One of the biggest hurdles to finding an alternative lender is the choice available. Unlike the big six banks, there are many different kinds of alternative lenders. It can be hard to know where to start once the mainstream lenders reject you.

Canadalend.com has a range of independent experts. They have many years of experience in the mainstream and alternative financial markets. When you talk to someone at a bank, the bank incentivizes them to sell you a specific product. Our experts will help you find the right product for you.

If you contact Canadalend.com today, we can be your guide to the many alternative lenders out there. We can help you find the product you need to meet your financial aims.

When it comes to getting a second mortgage, you’ll need to go through an approval process. Mainstream lenders, such as banks, will emphasize different things over alternative lenders. While there is no standardized process for either group, we’ll take a look at some of the factors that come up repeatedly so you can be prepared.

Canadalend.com can help navigate your mortgage needs no matter your Income

Lenders will want to know that you have money coming in to repay your loans. Mainstream lenders prefer to see borrowers with regular income. Such as a monthly salary. They may also ask that you undertake employment verification, depending on your circumstances.

Alternative lenders like to see regular income too, but they can be more flexible. People with irregular income, freelancers, or the self-employed, can find more accomodating arrangements with alternative lenders.

Utilizing Your Equity

When you take out an initial mortgage, the lender gets what is called a lien on the property. That’s the right to sell the property to settle a debt. Over time, as you progress through the schedule of a mortgage, you accrue equity. As you make monthly payments to pay down the outstanding amount, you start owning more of the property.

Lenders that offer second mortgage products have a consistent view. While they’re happy to leverage equity that you have accrued, they’re aware of that lien the other lender holds on the property. That means if you default on your mortgages, the first lender gets paid first, and the second may get nothing. Because of this, equity-based second mortgage loans carry a higher amount of risk for the lender.

If you intend to utilize equity against a second mortgage, you’ll need an up-to-date statement of account from the initial lender.

Canadalend.com can assist no matter your Credit Score

One of the earliest steps to take before beginning your search for a lender is to check your credit score. There are multiple ways to do this, but as you are about to enter a financial process, the more in-depth the better.

In Canada, credit scores run from 300-900 and are determined by Equifax and TransUnion. A score above 650 is seen by many lenders as the ideal scenario. If a score is below 600, then a borrower should start to expect some additional conditions or constrictions regarding their loan.

Credit scores are essential no matter who you borrow with. Working with traditional banks, they form a core part of the approval process. Alternative lenders place less emphasis on credit score, preferring the ability to pay over a solid credit history. This is particularly useful to those seeking a second mortgage for debt consolidation. Alternative lenders specialize in helping people recover from past errors of judgment.

Navigating the Process

Which documents to have prepared, and when, can be a frustrating part of the process. With each lender doing things differently, how can you try to bring some consistency to the process?

The one thing all lenders have in common is that you will need to provide identification documents. The number required, and their type, is at their discretion. But, as with most matters of identification, government-issued documents are best – passport, drivers license, etc.

At Canadalend.com, our independent experts are well versed in the approvals process with many different lenders. Decades of experience and access to hundreds of different lenders mean they can help you find the right product for you. It also means that they are experienced guides when it comes to finding your way through the approvals process.

By contacting Canadalend.com today, you can speak to one of our experts, find a product that suits your needs, and get support to navigate the approval process successfully.

When the time comes to consider a secondary loan, it may be worth considering your home equity position. Equity builds up in your home, or other property, over time, as you pay off a loan secured on it. This equity is the percentage of the property you own through repayments of the first loan.

It has become increasingly popular for borrowers to utilize this equity as a form of guarantee on a second loan. Home Equity Loans can be used for a variety of reasons. Depending on what you want, the loan is for will determine what type of home equity loan you should be considering.

Home Equity Loan

The standard Home Equity Loan (HEL) works much like a regular loan. You and the lender agree on a schedule for repayments along with interest rates, penalties, etc. On the whole, you may find the interest rate on a home equity loan is slightly higher than a standard loan. This is because it is the second loan on the same property. In the event of your bankruptcy, the first lender will be paid first from the sale of your estate. If there's nothing left after that, the second lender doesn't get paid.

To minimize the potential for paying a higher rate, borrowers are best advised to shop around. The major banks are a good place to start, but it’s also worth seeing what an alternative lender might have to offer. They can often equal, if not beat, bank rates and can be more flexible on terms, fees, and penalties.

Home Equity Loans are often used as a way to pay bills. If this is the case for you, keep in mind that most banks will want to see a good credit score and predictable future earnings.

Home Equity Line of Credit

A home Equity Line of credit functions in the same way as a HEL, the equity in your property determines how much you can borrow. However, instead of the loan amount being made available to you as a lump sum at the start of the schedule, it instead forms a pool of money you can draw from.

This form of loan is particularly useful for borrowers that want to undertake a period of repairs to their home. This may be part of ongoing regular maintenance and upgrades, or it might be in the year or so before putting a property up for sale.

Having a pool of money that you can borrow from as and when you need to allows borrowers to plan with confidence without the worry of how they will pay any particular bill for works as and when it comes. They can simply release funds from the line-of-credit pool, and know they're not going to overspend the initial borrowing figure.

Home Equity Lenders

As previously mentioned, Home Equity Lenders can sometimes get the worst part of a bankruptcy situation. When dealing with banks, their inclination is to penalize the lender with higher rates. This is their way of protecting themselves against the worst, even if it doesn't happen.

Many Canadians who take out Home Equity Loans find a better deal through alternative lenders such as credit unions or other financial institutes. The advantage of these lenders is their flexibility, where banks tend to lean towards rigidity. The downside? There are only a few major banks; there are a lot of alternative lenders.

At Canadalend, our independent experts have access to hundreds of different lenders and their financial products. Unlike advisors at a bank, they don't get incentivized to sell you a certain product. Their sole concern is finding the lender and product that meets your needs, whether that's a Home Equity Loan or a Line of Credit.

To find out how you can make your home equity start working for you and your future, contact Canadalend.com today and talk to one of our experts.