02 Nov What’s the difference between A lenders, B lenders and private mortgage lenders?
When it comes to mortgages, 2017 brought much ado about many things. Perhaps the most important of all the new rules on mortgage lending was the introduction of a stress test by the Office of the Superintendent of Financial Institutions (OSFI), which came into effect in January of 2018. What these rules meant was that even borrowers with a down payment of 20 per cent need to face a stress test. The stress test involves finding out if applicants can afford to pay interest at either the five-year average posted rate, or two percentage points higher than the rate their bank or broker offers them, whichever is higher. (Check our blog post on the Stress Test). However, some of these prospective buyers who have difficulty qualifying for a mortgage from a traditional lender under these rules are beginning to consider other options. This is where we come across terms such as shadow lenders, alternate lenders and private lenders. If you are among this group of people, this section will help you understand what these non-traditional lenders mean and what you are getting yourself into.
A lenders vs B lenders
One thing we emphasize in almost every blog post is the fact that when you are looking for a mortgage, there is so much to choose from, including the different lenders that can assist you. “A lenders” is the term given to traditional lenders, such as banks and credit unions. Essentially, these lenders focus on customers who have good credit scores and a reliable source of income. The term A comes from the fact that they are “A” customers. Due to the fact that these institutions are regulated by the federal government, anyone who goest to these lenders for a mortgage will be submitted to the stress test. In the case of credit unions, their regulation is provincial, which means that they did not have to adopt the stress test rules. However, in order to protect their own interests and their customers, most credit unions are designing their mortgage lending guidelines so that they align with the stress test rules.
“B lenders” are institutions that offer option for the “B” customer. Essentially, these institutions offer a lower barrier of entry to qualify for their products, but can offset that with higher interest rates. Hence the importance of really understanding the specific conditions under which the loan is given to you to ensure you will not be in a situation of high interest rates you won’t be able to afford. However, these lenders are reputable in the lending field. They normally fall into two main groups:
The Monoline Lenders provide a specific, secondary product to home buyers with a weak credit, who cannot qualify for their primary offering. The Alternative Lending Organizations are specifically designed to assist people who do not fit the guidelines of mainstream lenders. The mortgage rates from Alt-A lenders are typically quite competitive, often only 1 – 2% higher than A lenders, and they will be more lenient in the credit rating that they require to qualify for a mortgage. There may be a lender fee associated with an alternative mortgage, depending on the lender.
Private lenders are unregulated mortgage lenders, who tend to be a last-resort option for home buyers in Canada. They will typically offer mortgages based on the equity available in your existing home, rather than looking at your credit rating or income. While these private lenders require very little in the way of qualification, their mortgage rates tend to be higher than the rates of A or B lenders. As with B lenders, it’s incredibly important to pay close attention to the deal that an unregulated lender is offering you. We recommend getting the support of a broker, who can assess the offer on your behalf and provide trusted advice and should question a lender on the alternatives should a default happen on one of the payments. Some lenders quickly force their clients into a power-of-sale, while others will find a way to work out an arrangement that will allow them to keep their home.
Until you are happy with all the answers you have, do not sign anything. If you are not, don’t hesitate to ask questions and have a lawyer – not recommended by the lender – to help you review the documents and potentially identify risky clauses. Last, but not least, because alternative lenders are not subject to the same regulations as A lenders, they can change unconventional fees, some of which may even be illegal.