In the event that traditional banks, known as A lenders, reject your mortgage application, there is an alternative sector of lenders, called B lenders, that can cater to your financing needs.

B lenders play a crucial role in Canada’s tightly regulated mortgage market. If you are unable to meet the qualification requirements of A lenders, such as major banks or credit unions, a B lender mortgage can help you realize your dream of homeownership.

B lender mortgages are designed for borrowers who do not meet the criteria set by A lenders, making them potentially more expensive in terms of costs and conditions. It is crucial to have a clear understanding of how B lender mortgages work before applying for one.

What is a B lender?
B lenders, sometimes referred to as subprime lenders, are financial institutions specializing in mortgages but do not operate under the same regulations as A lenders. As they are not bound by the standards imposed on chartered banks like RBC, TD, or Scotiabank, B lenders have more flexibility in terms of the borrowers they lend to and the terms they offer.

For instance, A lenders are required to conduct stress tests on mortgage applicants and ensure their debt service ratios fall within established limits. B lenders, on the other hand, are not obligated to stress test their clients and have greater leeway when it comes to debt levels. This allows them to lend larger amounts to certain borrowers who may not qualify with an A lender.

It’s important to note that B lenders are willing to work with borrowers even if they could be approved for a mortgage with an A lender. In many cases, the “B” in B lender refers to borrowers who are still creditworthy but may not be an obvious choice as a mortgage client.

Differences between A lenders and B lenders
There are three main areas where B lenders may differ from A lenders. The B lending industry is quite diverse, so these differences can vary across institutions.

Qualification guidelines:
B lenders generally have more lenient qualification criteria for borrowers. They place less emphasis on credit scores and debt ratios, and may not consider past bankruptcy as a dealbreaker.

B lenders are less stringent than A lenders when it comes to borrower income, and they may be more inclined to approve larger mortgages for self-employed individuals or those with inconsistent income. B lenders are also more accepting of non-traditional income sources and down payment funds, such as inheritances, bonuses, and commissions.

One reason B lenders can take on additional risk is because they require higher down payments, which allows them to lend smaller amounts. It is not uncommon for a B lender mortgage to require a 20% down payment.

Range of products:
Some B lenders offer standard products like closed, fixed-rate mortgages, but they are also known for providing a wide range of customizable options. This enables them to create financing solutions for borrowers with unique circumstances.

For example, B lenders might offer mortgages specifically tailored for self-employed borrowers, newcomers to Canada, first-time homebuyers, or individuals purchasing property abroad. However, B lender mortgages typically have shorter term limits, often maxing out at three years.

Costs:
To compensate for the increased risk they undertake, B lenders charge higher mortgage interest rates compared to A lenders.

The interest rate on a B lender mortgage can be up to 2% higher than what an A lender charges for a similar product. Additionally, you may need to pay a fee to the B lender equivalent to 1% of the loan amount, along with other unique fees. It is essential to fully understand all the costs associated with a B lender mortgage before committing to one.

Where to find B lender mortgages in Canada?
Monoline lenders:
Some of the prominent B lenders in Canada are monoline lenders, which are non-bank financial institutions exclusively offering mortgage products. Monoline lenders work with borrowers across the creditworthiness spectrum and are popular options for individuals overlooked by A lenders.

Major Canadian monoline lenders include:

First National
MCAP
Merix
CMLS Financial
Radius Financial
MCAN Home Mortgage Corporation

Credit unions:
While credit unions are typically considered A lenders, they may occasionally provide mortgages to individuals who cannot qualify at major banks. As they operate under provincial regulations rather than federal ones, credit unions may offer an exemption from the mortgage stress test, providing a useful alternative that other A lenders cannot provide.

Private lenders:
Private lenders range from large institutions such as mortgage investment corporations to individuals seeking a quick return on their investment. Smaller private lenders face fewer regulations than other B lenders, resulting in potential unexpected fees, unique conditions, and significantly higher interest rates. Due to the associated risks, obtaining a mortgage from a private lender is generally considered a last resort.

Who should consider a B lender mortgage?
The existence of B lenders in Canada is necessary because not everyone can walk into a local bank branch and secure an affordable and hassle-free mortgage. However, there are several types of borrowers for whom a B lender mortgage might be the best or only option, including:

Newcomers to Canada: Eventhough they may have a good credit history in their home country, newcomers often lack the credit history required by A lenders. B lenders may be more willing to work with them.

Self-employed individuals: Self-employed individuals often face challenges when it comes to proving a stable income. B lenders may be more flexible in considering their income sources and providing mortgage solutions.

Those with past credit issues: Borrowers who have experienced credit issues in the past, such as a low credit score or a history of late payments, may find it difficult to qualify with A lenders. B lenders may be more willing to overlook these issues and offer mortgage options.

Individuals with high debt levels: A lenders have strict debt service ratio limits, which can make it challenging for individuals with higher levels of debt to qualify. B lenders may be more lenient in this regard.

Unique property types: B lenders may be more open to financing properties that A lenders consider unconventional or risky, such as rural properties, non-owner-occupied properties, or properties in need of significant repairs.

It’s important to note that while B lender mortgages can provide opportunities for those who don’t meet A lender criteria, they often come with higher costs. Borrowers should carefully consider their options, compare rates and fees, and assess their ability to comfortably afford the mortgage payments before proceeding with a B lender mortgage.

As always, it is recommended to consult with a mortgage broker or financial professional who can assess your specific situation and guide you in finding the best mortgage solution for your needs.