A recent report from the Canadian Mortgage and Housing Corporation (CMHC) found that more people in 2022 renewed their mortgages with alternative lenders than in previous years. The report cites increased interest rates and stricter rules around borrowing for this change. It’s simply more difficult to qualify for a mortgage with traditional lenders in the current environment – even for people who have been paying off a mortgage successfully for a few years.

The alternative lending mortgage market has been an important part of the economic landscape in Canada since at least the 1990s. Borrowers who are unable to secure mortgages at one of Canada’s top tier banks can sometimes get into the housing market through alternative lenders.

But what exactly are alternative lenders? And should you consider using one?

What is an Alternative Lender?

Alternative lenders (also called B-lenders) are financial companies. They are regulated by the Office of the Superintendent of Financial Institutions (OSFI).

While the term alternative lender may bring to mind a shady, back-alley mortgage company, that isn’t usually the case. Alternative lenders can include credit unions and second tier banks like Laurentian Bank of Canada and the National Bank of Canada. They also include monoline institutions that only offer one type of mortgage product.

Who Should Try an Alternative Lender?

People who have tried unsuccessfully to secure a mortgage through one of Canada’s top six banks (TD, RBC, BMO, Scotiabank, CIBC, or Desjardins) often turn to alternative lenders.

This may include people who are self-employed and don’t have the regular income banks like to see, people new to Canada still establishing credit, or those who have less than ideal credit scores.

It’s important to note that you may need more of a downpayment (20%) in order to qualify for a mortgage through an alternative lender.

Pros

The advantage to using an alternative lender is the ability to get into the housing market, even if you don’t tick all the boxes on an A-lender’s list. Many people are responsible and up to making mortgage payments, even if their credit scores are less than perfect, or their income is untraditional. Alternative lenders help meet this need.

Once in the housing market, most people are able to switch to A-lenders after a few years, though in today’s financial climate, this may take a little longer than expected.

Cons

Naturally, there are also downsides to consider. Alternative lenders usually charge higher interest rates than other institutions. With Canada’s prime lending rate already increased compared to previous years, this can be a heavy burden.

Some lenders offer interest-only loans, which means you won’t be paying anything on the principal of your mortgage. As a result, you’ll be paying off your mortgage longer.

Before signing on the dotted line with a B-lender, make sure you have an exit strategy in place. You don’t want to be paying higher interest rates for more than a few years.

The Takeaway

Alternative lenders can provide a valuable service by helping people get into the housing market for the first time. Before going down this path, make sure you do your homework. Read all the terms a lender is offering, and crunch the numbers before signing on the dotted line.

If you’re thinking of trying an alternative lender, drop us a line. We’d be happy to take a detailed look at your financial picture and give you tailored advice.