Subprime (B) and private lending options available to clients in Canada
In Canada there are three lending tiers. The top tier or A lending as it sometimes called refers to clients who can qualify based on income and credit score to support the mortgage. This type of lending would represent the majority of mortgage lending in Canada. There are however two other lending options available to consumers, Subprime (B) and private lending. This source of lending represents a large portion of the overall Canadian mortgage lending market.
B lenders are large Canadian institutions offering a variety of lending mortgage products. Clients that fall into the B category would be missing one of the major components that the banks and other A lenders require such as income or good credit. They maybe clients who were recently bankrupt or who are self employed and do not show enough income to qualify. Whatever the case these lenders provide a good lending option to the consumer. In the last 12 months new lending guidelines have made it tougher to qualify Self Employed clients through the A lending option. Today more Self Employed borrowers will look to B lending for their mortgage. B lenders will look for at least 15% down on a purchase or refinance. Interest rates are higher than A lenders but not by much, maybe 1.00% to 2.00%. There are usually fees of around 1.00% to 3.00%. The borrower does not pay insurance premiums as these lenders are self insured.
This type of lending is usually offered as a short term solution until the client either gets there credit back in line or has the income to qualify through an A lender. 1 to 3 year fixed terms are common with this type of lending.
These lenders are sometimes wealthy individuals who are searching for a better return on their money. They work with lawyers or set up their own companies to loan out money to consumers.
These lenders lend on equity in the property. The lender is not concerned with credit or income but will review both to get an overall feel for the applicant. Their main interest is in the property. Private lenders will lend on properties outside of the box such as churches, farms and raw land. Construction financing for small and large projects is popular in private lending because the easy access to the funds without too much restrictions which the A lender can add to a construction mortgage loan.
As with the B lending private lending provides a short term or quick fix solution. The terms are usually shorter and not over a 1 year period. Interest rates and fees are higher than B lending between 6.00% to 9% on a first mortgage and 10% to 15% on a second mortgage. The maximum loan to value is around 75% for a first mortgage and 90% for a second mortgage.
Second mortgages are a popular lending source for clients who can only get a first mortgage up to say 70% but need 80%. A second mortgage can be set up for the other 10%. Another example is clients who need to refinance a property but do not qualify through an A lender or maybe do not want to break their first mortgage and therefore set up a second mortgage instead. Clients selling their home may require a second mortgage to renovate or fix up their home before listing.
Whatever your mortgage lending requirement the Canadian market has an abundance of lenders to satisfy your needs. Working with a mortgage broker will allow you access to these lenders and therefore provide you with the best lending options.
Robert Clancy 416 899-1467