Banks own the vast majority of loans in Canada. In fact, many people believe that banks are their only lending options. But did you know there is another option?
Because so much of the world’s economy relies on banks remaining solvent, they are required by law to ensure the loans they approve are safe risks. Consequently, when you get a loan from a bank, they want to make sure you have a steady salary, excellent credit rating and that your purchase is a good investment for the institution.
Not everyone can meet a bank’s high standards. Many people are self-employed and therefore have uncertain cash flow, some are coming out of a bankruptcy or consumer proposal and have bad credit ratings, and some just need a loan faster than a bank can provide.
If you are one of these people, a subprime loan may be the correct option for you.
A subprime loan is offered by an individual or loan company that provides the money needed to buy or refinance a home. This type of loan is considered a “B” loan, which means the borrower is missing one of the key components that qualify them for an “A” (or bank) loan.
Home Capital, Canada’s largest non-bank lender, was one of the major lenders in the subprime industry until 2017 when they scaled back their lending so they could restructure. Other companies and private individuals have filled the gap. In fact, private lenders currently hold about 15% of Canada’s mortgages, a number that has steadily increased as private lenders have recovered from the recession.
Subprime lenders are most concerned with the property type and value when lending their money, which means they will loan money to people with bad credit and those who are self-employed. However, there are some drawbacks. The interest rates are higher than those at a bank and you will have to have a sizeable down payment to show that you can manage your finances.
Private and subprime lenders are interested in a quick turn-around on their investment, so most subprime loans are short-term, interest-only loans that last only 1-3 years—enough time for the borrower to clear up credit issues so they can return to borrowing from a bank.
People often don’t know where to start when seeking a subprime loan, and there is understandable trepidation about entering into an inequitable deal. That’s why if subprime lending or “B” lending is the best option for you, then you need to use a good mortgage broker when dealing with subprime lenders. Mortgage brokers know reputable subprime lenders and ensure that you get the best deal for your situation.
Your mortgage broker will also help you plan for next steps after the subprime loan has ended. Ideally, the loan will last only as long as it takes for you to repair your credit, at which point you should switch over to a loan with better rates and conditions. Mortgage brokers can help you make the right decisions to repair your credit and then broker the best “A” loan on the market.
We have access to over 50 banks and lending institutions, including private lenders. Contact us to explore whether a private loan is right for you!
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Rasha Ingratta & Mortgage Associates
By Mortgage Intelligence