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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.

Within Canada, for a variety of reasons, citizens are taking full advantage of second mortgages. Whether combining credit cards, paying for home repairs, or buying property, funds from a second mortgage improve a borrower`s situation.

The key question for many borrowers is, of course, who will lend me the money? A hundred, or even fifty, years ago the potential answers to that question were few. Banks had the majority of the loans with credit unions holding a small share of the lending business.

In 2020, there are three categorizations of lenders. The A-lenders are the traditional lending institutions, banks and credit unions. Next are the B-lenders, who despite their B status, often offer a service on a par with the A-class. B-lenders account for a smaller share of the market but can offer better rates and have a lower threshold for entry. They can work with borrowers rejected by the A-class.

Finally, there are private lenders who specialize in bespoke lending arrangements which may carry more risk. These loans can be highly specialized and are used when a different kind of thinking is needed.

Credit Unions

Credit Unions are formed by people pooling their money. They buy shares in the union and the money they use is put in a collective pool. This pool is then used to create loans with an emphasis on “people helping people.” The union is owned and operated by the people that buy shares. As such, credit unions enjoy tax-exempt status and operate on a not-for-profit model. Their loans can be structured in a way that a bank’s loan cannot.

One of the biggest changes to Canadian mortgaging in the last ten years has been stress testing. Stress tests are designed to make sure that people getting a mortgage can afford it. As a side effect, it also keeps people who could afford a mortgage, from getting one. Increasingly, credit unions have been filling that gap with loans that do not need stress testing.

B-Class Lenders

Often B-Class lenders are viewed as exactly that, B-Class. There are certainly some lenders that behave badly in both classes. Not being a bank doesn’t immediately mean a B-Class lender isn’t a good choice.

B-Class lenders are many different kinds of companies. Sometimes they can be businesses that are looking to loan money. They can be private groups operating in a similar way to a credit union. They might also be smaller financial companies specializing in loans and nothing else.

What these companies all have in common is a desire to lend money. As they are not financial institutions, they do not have to meet the same criteria as banks do. They can offer second mortgages without the need to stress test for example. B-Class lenders compete with the A-Class by offering a high standard of service to more borrowers than the A-Class can.

When you work with a B-Class lender you can expect a slightly higher interest rate on your loan as they do work with slightly riskier investments. Shopping around can help you find a good product with the right rates. It’s even possible to find rates that are equal to or lower than those offered by banks. Getting the best interest rate, fixed or variable, can save you tens of thousands of dollars on your loan.

Finding Solutions

Those who wish to borrow, face many choices. They could connect with one of the many Canadian credit unions. They may be best suited to working with one of the many B-Class lenders. Working out what’s going to be best, short and long term, can be tough.

Canadalend.com’s financial experts give you clear independent advice. This is because they are exactly that, independent. Unlike at a bank they’re not incentivized to sell you unsuitable financial products. Instead, they can find the lender and product that’s going to best serve your needs.

Get started by contacting Canadalend.com today to discuss your needs so that we can find the right lender for you.

In July 2019 the Bank of Canada released a statement anticipating stabilization within the national housing and mortgage market. It also confirmed it was maintaining the targeted 1.75% interest rate despite some future uncertainty, particularly around international trade.

During periods of stabilization like this, many homeowners take advantage of a second mortgage as a means to improve or repair their homes. Increasingly these mortgages are taken out with an interest-only repayment schedule.

Homeowners who are intending to sell their property in the short-term future take a second mortgage to pay for any work required. They pay a monthly interest payment on the full loan amount rather than a larger payment towards the interest and principal debt. Then, when they sell their upgraded property, they can pay off the loan with the extra value the improvements have brought.

Whenever a second mortgage or home equity loan is being sought for, one of the key decisions a borrower will have to make beforehand is whether they want their interest rate to be fixed, or to be variable.

Holding Steady

A fixed interest rate is exactly what it sounds like - the rate of interest paid on the principal is fixed for the term of the loan.

For borrowers, fixed rates offer consistency and a predictable payment timeline when rates are rising. No matter how much the Bank of Canada’s rate rises, they know they are locked in at the lower interest rate. Over time the total debt reduces, and the interest payment declines with it, this makes budgeting and saving money easier but doesn’t allow a borrower to benefit when interest rates go down.

For lenders fixing an interest rate also protects them against variances in financial markets. No matter what happens to the Bank of Canada’s benchmark interest rate, the rate they have on this loan stays the same. Lenders tend to prefer the dependable nature of fixed rates as an alternative to trying to forecast what will happen with the interest rate over the life of the loan.

Periodic Change

As an alternative, variable interest rates change over time. The loan will be based on an indexed rate, such as the Bank of Canada’s rate, or another benchmark interest rate such as LIBOR. The rate payable on the loan is equal to the benchmark rate plus a margin amount. So, for instance, a loan may be based on a benchmark rate plus a 2% margin. So, when the benchmark rate is 2% the loan rate is 4%.

When it comes to mortgaging, most lenders offer a product that has an initial period of fixed rates, say five years, followed by the rest of the schedule being paid according to interest rate fluctuations. The payments for the latter period are usually recalculated, or “reset”, based on the underlying interest rate every 1-5 years.

Variable rates offer borrowers a chance to make the most of their money. While interest rates are low the potential for additional payments is higher. Additional payments come off the principal loan, so when rates rise, borrowers are not as badly affected.

For lenders, variable rates offer a form of guarantee as loans come with a margin, while rates may go down over the life of a loan, they are still guaranteed to be getting more than the benchmark rate in interest payments.

Growing Interest

Depending on what you want a second mortgage for, it can be a huge influence on the kind of rate you have. If it’s for improvements to your home prior to sale, debt consolidation, or any other reason, the interest rate is an important factor in getting the best value loan.

Our independent experts have access to hundreds of lenders and their products. With decades of experience, they can find the right financial product for you and ensure that the product has the right interest rate structure for you. Their independence empowers them to find the product that best suits your needs rather than sell you whatever product their employer is incentivizing them to sell.

Contact Canadalend.com today to find out more about what options might be available to you and to speak to someone whose interest is in finding you the best financial product they can.

Contact us to learn more about the Fixed or Variable Rate Second Mortgage options available and experience The Canadalend Advantage today!

In Canada, over the last few decades, there have been slow but steady changes to industry and employment norms. Where people work, and who they work for, is changing. In the decade leading up to 2017, there was a steady increase in the number of tax returns that included self-employment income. This reporting change was particularly notable for women, who are increasingly taking on sole responsibility for mortgages and property ownership.

While some of the self-employment earnings increase is citizens incorporating a side hustle (crafting, repairs, skills, etc.) into their traditional earnings, it is also indicative of a global trend towards a more liberated model for employment. Working from home is becoming more common as is freelancing and contract work as a sole model of earnings.

While freelancing can sound enticing, working at home, being your own boss, choosing the hours you work, one of the most common hurdles is adapting to fluctuating income, rather than a predictable monthly salary. This can be difficult enough with day-to-day considerations such as food and bills but getting a mortgage can become an uphill struggle.

The Challenges

After the global financial turmoil, the Office of the Superintendent of Financial Institutions implemented and developed the B-20 guidelines, settling on a finalized version in 2017. While the restrictions that were implemented were designed to try to prevent a repetition of the problems that lead to the financial crash, they have also placed the self-employed worker within an undesirable mortgage framework.

Recent predictions of 45% self-employment in Canada have not yet come to pass but are undoubtedly part of the near future. So, as the proportion of citizens that are making some, or all, of their income via self-employment rises, more of them will start to fall afoul of the increased stringency the guideline enforces.

Prior to the B20 guideline, income was part of the approval factor for mortgages, but credit score also played a larger role. Most institutions would give a basic form of approval to anyone with a provable income and a credit rating of 675 or over. Large institutional lenders no longer see entrepreneurs as a sound financial opportunity, Instead, rating them as risky (almost by default) based more on their provable income rather than their credit score. Another factor in self-employed income is the expensing of items against tax which further muddies the perception of an individual’s income.

So, even where an independent worker might be able to prove they have a regular income, perhaps as a result of retainer agreements, they can still be viewed as undesirable borrowers by banks.

How to Prepare

Despite the changes brought in by B-20, there are some steps that the self-employed can undertake to improve their position when approaching a lender regarding a mortgage.

Along with income and credit score, a lender will likely look at your tax status to see if you owe a sum to the taxman. This check usually comes in the form of a review of your standard T1 general tax return and your business and professional activities statement as issued by Revenue Canada. If you do owe taxes, this may be considered as debt you are carrying, so wherever possible make sure you are up to date with your reporting and your payments before starting the loan process.

In order to “win over” a lender, be prepared to provide more information than normal, particularly business-related paperwork such as tax statuses for the business, contracts or agreements that might indicate future earnings, and a variety of other documents at the lender’s discretion. Be prepared by making sure you have as much easy access to your personal and professional financial documents as possible.

Finding a Lender

One of the upsides for self-employed borrowers is the diversity of lenders. Since the millennium, the financial market in Canada has grown and developed beyond the core banking institutions of the last century. A plurality of lenders also means a greater number of products available to borrowers. Products that take into account the financial status of the borrower as well as their aims.

All those products need assessing though, they need to pass your criteria as much as you pass theirs. Will I be protected if my earnings vary? Will I have to make a larger down payment? Will I have a shorter amortization period? Will I pay a higher interest rate?

At Canadalend.com our experts are knowledgeable, helpful and, most importantly, independent. Our experts have decades of knowledge and access to hundreds of lenders and their products. Unlike a mortgage officer at a large financial institution, they are skilled at finding the product that matches your needs, rather than selling you a specific product for a commission. Whether or not that product is right for you.

Contact Canadalend.com today to learn more about how we can help find the right product for you.