by Multi-Prêts Mortgages
What you’ll learn
Although still marginal, alternative mortgage loans are starting to get Canadian buyers talking. In 2015, they were estimated to make up a little over 2% of the market, whereas they never rose above 1% prior to the 2008 crisis.
Alternative lenders generally serve those that are looking for a mortgage, but don’t meet the new stricter requirements of traditional lenders.
As mentioned in the next paragraph, an alternative lender agrees to take on a higher risk of defaulting than a bank would, for a slightly higher interest rate. A mortgage request analysis evaluates the risk that the borrower won’t be able to make his payments. The lender then estimates the borrower’s repayment ability based on the amount, the borrower’s source of income, their credit use (by looking at the entire credit report rather than just the score), the source of the down payment, accumulated assets and property (condition and location).
An alternative loan is the way to go if the risk is judged too high by a bank. It should be noted, however, that each bank has their own evaluation criteria. It has happened that a borrower is refused by one bank, and accepted by another. This is why you should deal with a broker, who can guide you towards the right lender.
Obviously, alternative lenders are taking on a greater risk by dealing with clients that have been rejected by banks and credit unions. To make up for this increased risk, their interest rates are higher.
This provides an opportunity for those with bad or nonexistent credit to build up their rating and eventually access financing from regular lenders. Incidentally, read our article to find out more ways to build up your credit rating.
The same applies to those who are going through a period of uncertainty, such as a divorce. If you find yourself in such a situation, read our article, “Your mortgage after a divorce”.
It is, however, important to be careful when dealing with this type of lender. Although many offer good service, it’s still very important to shop around and find out the terms and conditions. A mortgage broker’s experience and support are all the more useful in these circumstances.