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 October 2017, the Federal Government announced that a mortgage stress test would be applied to all mortgage applications in Canada. This news caused a firestorm of opinion and questions as many believed that it would block tens of thousands from homeownership.
