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Regulated banks are required to ensure that the homebuyers to whom they are lending money can pass stress tests. In other words, that they have the means and income to successfully pay off their mortgages. These banks are often referred to as A lenders.
Canadians, however, who have lower credit scores and need more flexibility than the big banks can offer, can turn to so-called B lenders.
B lenders are financial institutions which cater to people who do not fit in the A lender category. This might include people with low credit scores, new Canadians who have not yet built a credit history, or those with incomes that do not qualify them for mortgages at the A lender institutions.
B lenders will usually charge a lender's fee. Their products are meant to be short-term solutions, so the term length is usually only one to three years. The idea is to convert your mortgage to an A lender at significantly lower rates once your credit or income situation improves.
Credit score requirements, mortgage interest rates and availability of insurance are the major differences between A lender versus B lender mortgages in Canada.
While A lenders look for qualifying credit and income, B lenders focus more on the equity in the home. Often, B lenders will prefer properties in larger urban areas as they consider them more saleable.
A lenders cater to customers with good credit scores and reliable income streams. Most people settle on funding their mortgage through them, as they are federally regulated (credit unions are subject to regulation at the provincial level) and have a long and established history of good lending practices.
Institutions that operate in the A lender category have a detailed mortgage application process you must go through in order to be approved for a mortgage. Special conditions must be met in order to secure a mortgage, including stress tests.
As B lenders are taking on more risk, their rates are approximately 1.25% – 2% higher than rates from A lenders. B lenders will usually charge a 1% lender fee as well. They are meant to be short-term solutions, so the term length is usually only one to three years.
In some cases, neither A nor B lenders will fit the bill, so to speak. In these cases, private lenders are there to fill in the lending gaps. Private lenders are generally (but not always) individuals looking to invest their money in mortgages. Rates can be high and can range between 7-8% on first mortgages, or 10-13% on 2nd mortgages.
Private lenders will often charge a 1% fee, but in some situations the fee can be higher. While brokers get paid by A and B lenders, they do not get paid anything by private lenders, which means there will be a fee from the broker as well. While private mortgages are the most expensive, they can bail people out of sticky situations without their needing to sell their homes.
Knowing which mortgage is best for you starts with answering a few questions:
Answering these questions allows the homeowner to have a fulsome picture of their finances and to see which lender is a good fit for their circumstances.
Some of the more well-known B lenders in Canada include:
Finding the best mortgage rate from B lenders starts with comparison shopping. RATESDOTCA offers you a fast and efficient way to review mortgage rates at the click of a mouse.
Choosing the best rates also means talking to institutions about your situation. Often, B lenders can or will customize mortgage agreements so speaking to them directly will give you the full picture you need to make the best decisions.
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