With many trying to enter Canada’s red-hot housing market, the question of how to get the best possible mortgage sits on the mind of many Canadians. Housing prices are surging as the Bank of Canada gets ready to raise interest rates – so how can you enter the market if a bank won’t give you a loan? That may mean looking at a B Mortgage Lender.
What are A Lenders?
A Lenders, for the most part, are the most prominent financial institutions in Canada that (as part of their many services) are in the business of giving people loans to buy houses. Even if you can’t define A Lenders, you know what they are. They are the largest banks in Canada: Bank of Montreal, CIBC, RBC, TD Bank, National Bank of Canada, and Scotiabank. They are also the largest credit unions in Canada: Vancity, Meridian Credit Union, Desjardins and more.
What makes these lenders rank A is their reputation and demand. When people are looking for a mortgage, the big banks, and to a lesser extent, the big credit unions, are who people go to. Part of that is a feedback loop, as people go to them because they have the capital to do business with a lot of people, partly in turn because so many people go to them.
What also makes them A Lenders is that they are also compliant with the federally mandated Mortgage Stress Test. Even if you don’t need mortgage loan insurance, you must pass the stress test to get a mortgage with an A Lender. To pass the stress test, you need to pass the minimum qualifying, which is the higher of 5.25%, or the rate offered by your lender plus 2%.
Banks are compliant with the stress test because the federal government regulates them. Credit Unions and Caisses Populaires technically do not have to comply with the stress test, as they are regulated by the provinces and not the federal government. However, the large credit unions, A lenders, comply with the stress test by choice. Aside from those seeking a mortgage, you also need to pass the stress test if you already have a mortgage but want to refinance your home, switch to a new lender or take out a home equity line of credit. The Mortgage Qualifier Tool is useful for those wondering whether they qualify for a mortgage from an A Lender.
In short, A Lenders get the rank of A because of their reputation, their capacity to give loans, and the fact they are compliant with the mortgage stress test. They have more red tape to get through – but less risk. If you get a mortgage from an A Lender, you are a “prime borrower.” Things are a bit different for B Lenders.
What are B Lenders?
B Lenders get the rank of B because they are often people’s second choice when they do not qualify for a mortgage from an A Lender. B Lenders typically provide mortgages to people who would not be eligible for an A Lender mortgage because of their income or credit score. B Lenders generally are Credit Unions of Caisse Populaires that do not follow the stress test and Mortgage Finance companies.
For many people, personal circumstances may make getting a mortgage from an A Lender difficult or even impossible. This doesn’t mean that those people are financially irresponsible: life is far more complicated than that. With the Canadian real estate market, those people may have the resources to afford a home, just not under the requirements from A Lenders. B Lenders are not giving out mortgages like free samples at Costco, but they have less stringent requirements than A lenders. For example, most banks, at a minimum, require a credit score of 600 (if not more) to approve people for a mortgage. B Lenders are more willing to give mortgages to those with credit scores below 650. Through the mortgage, they also allow borrowers to build their credit score. Asides from credit scores, B Lenders are more willing to provide mortgages to those with different types of income (A Lenders usually look for a steady, guaranteed income, making things more difficult for the self-employed), those with higher debt ratios or those who have been previously bankrupt.
Of course, because B Lenders are providing mortgages to those who would be considered higher risk (from a lender’s perspective), their interest rates tend to be higher, usually up to 2% compared to A Lenders. They also require a higher down payment than the typical 5%, generally at least 20%. Mortgages from B Lenders may also have higher closing costs. For many people, a B Lender may be an excellent option for those who are refinancing and want to switch from an A Lender to a B Lender.
How to find B Lenders?
Overall, the advantage of a mortgage from a B Lender is that they are more lenient to those who have a poor credit history or non-traditional sources of income. However, the disadvantages are higher down payments and interest rates. One other drawback to B Lenders is that because they are not as well-known as the banks, it can be harder to find more information. However, that’s where the right mortgage broker can provide immense value and find you a suitable B Lender for your situation.
However, beyond seeking a mortgage broker for help, B Lenders are also more common than you think. For instance, A Lenders may also have B Lender Divisions – so if you have a current mortgage at your bank or credit union, you may be able to find a B mortgage at the same institution. Banks dominate the market share of mortgages at 79% of the market, and Credit Unions and Caisses Populaires come in at second at 14% – a decent amount of those institutions have B Lender divisions. At 5%, the third-largest type of mortgage lender is Mortgage Finance Companies, Insurance and Trust Companies, followed by Mortgage Investment Entities at 2%. These institutions are the prototypical B Lender. So yes, B Lenders aren’t on every corner like a CIBC, but they exist, and depending on your situation, it might be worth a look.