The Ultimate Guide to Subprime Mortgages in Canada

Subprime mortgages account for more than 1 in 10 of all mortgages in Canada. But there was a time when the term “subprime mortgage” was a four-letter word in the Canadian banking industry. It was whispered under hushed tones in darkened hallways, oft with an air of equal parts smug superiority and contempt. Why, then, are so many Canadians turning to subprime mortgages? 

The financial profiles of many people just don’t fit inside the tiny, narrowly defined lending requirements set by traditional banks. Honest, hard-working Canadians with good credit scores and gainful employment can still be turned down for any number of reasons. So they’ve flocked to subprime lenders in droves. Let’s talk about subprime mortgages in Canada and why they’re growing in popularity. 

What does the word “subprime” mean?

Subprime refers to a borrower who does not meet the basic, ideal qualifications for a traditional loan through a conventional “A lender,” like a federally regulated bank or credit union. Subprime borrowers typically have poor credit scores, a history of bankruptcy or consumer proposal, or income that is difficult to verify.

What is a subprime mortgage?

Subprime mortgages work similarly to traditional mortgages. The biggest difference is that subprime lenders, called “B Lenders,” will often accept borrowers with poor credit. These loans typically have higher interest rates than prime mortgages, but they can still be a good option for people who might not otherwise be able to get approved for a loan.

Who needs a subprime mortgage?

There are a few different situations in which someone might need to get a subprime mortgage. For example, self-employed individuals often have trouble qualifying for traditional loans because they don’t have T-slips or pay stubs to show proof of income.

Another group that might need a subprime mortgage are new Canadians who haven’t had time to build up their credit score yet. And finally, people with lower credit scores may also need to apply for this type of loan. If your credit score is below 600, it’s considered bad credit. 

Keep in mind that even if you do have bad credit, there are still other options available to you besides a subprime mortgage. You might want to consider working on boosting your credit score first so that you can qualify for a conventional loan with better terms. 

Credit counselling services can help you understand your credit report and make a plan to improve your score. You can also check out our blog post on 5 Tips to Boost Your Credit Score Fast for more tips on improving your credit rating quickly.

There is no single “type” of person who borrows from a B Lender, because everyone has a unique financial situation. What was once taboo is now giving traditional mortgage lenders a run for their money.

Why don’t banks offer subprime mortgages?

We threw some shade on them at the beginning of this article, but the truth is, it’s not all their fault. They are heavily regulated by the federal government, which requires them to comply with a pretty strict regulatory framework, which includes, but is not limited to:

• Minimum Credit Scores
• Maximum Debt-to-Income Ratios
• The Stress Test

The Big 6 banks fall under the purview of the Office of the Superintendent of Financial Institutions (OFSI) which keeps a watchful eye on critical players in the financial industry such as banks, life insurance companies, loan companies and trust companies. Their mandate is to stabilize the economy and protect consumers from unnecessary risk and predatory financial practices. 

Still, when you’ve worked really hard to build credit, establish a career and save up the downpayment for a house, the word “denied” can trigger a lot of hurt feelings and animosity towards your mortgage specialist. Guess what, they feel bad too.

Getting denied is usually due to the OFSI requiring banks to make sure your application can pass the mortgage stress test.

What is a subprime lender?

In Canada, subprime lenders are known as B Lenders. They are private lending companies that extend credit to individuals who do not meet the basic lending criteria of Canada’s chartered banks and credit unions.

Because subprime B Lenders are private financial institutions, they do not fall under the same regulatory framework as traditional lenders. That’s why they are able to lend to people with complicated or less desirable financial profiles and charge higher rates. It also allows them to sidestep the contentious mortgage stress test. 

Some well-known B lenders in Canada include, but are not limited to: 

• MCAP
• Home Trust
• First National
• Merix Financial 
• RFA

Not just for credit-challenged people

These B Lenders typically lend to borrowers with weaker credit scores, lower incomes, or those who cannot provide a traditional 20% down payment on a home. However, they also lend to people with strong credit histories and high incomes whom the banks have still turned down for one reason or another.

Since the Great Resignation and the proliferation of the Gig Economy, more Canadians than ever are discovering new and creative ways to generate income. B Lenders simply provide another lending option to Canadians who have both the character and capacity to repay their debt.

But because they lend to borrowers in more challenging or unconventional financial circumstances, they charge higher mortgage interest rates to help offset the higher risk of default. Having said that, as subprime mortgages become more popular, their rates are becoming increasingly competitive.

In some cases, the rate of a subprime mortgage is only marginally higher than rates offered by traditional banks.

Should you consider a subprime mortgage?

You should consider a subprime mortgage if you can afford the cost of homeownership and it puts you ahead financially, yet traditional lenders still say no. 

Subprime mortgages are a good option for those who have had a consumer proposal or bankruptcy in the past but have regained control of their finances. Banks typically do not finance mortgages for individuals who have declared bankruptcy within the last two years, regardless if they have rebuilt their credit during that time and have saved an appropriate down payment. 

While subprime mortgages are typically geared to those with lower credit scores or incomes, there are many other reasons why someone with a strong credit file and higher income will turn to a subprime lender.

Self-employed people who have been in business for less than 2 years, or whose income tax deductions make their income appear abysmal on paper, may find themselves turned down by a traditional lender.

Those who make commission-only income, freelance or otherwise have irregular income through unconventional means will have a harder time getting a mortgage the traditional way. Basically, if you can’t provide standardized pay stubs you’re more likely to be turned down. 

Then there’s the property itself. Banks and credit unions are very strict about the type of property they’ll finance. So if you’re into alternative housing like the tiny house movement, buying a houseboat or purchasing a mobile home on rented land, the traditional lenders will likely take a pass on your application.

How do subprime mortgages work?

In order to qualify for a subprime mortgage, you’ll need to be a Canadian resident, be the age of majority in the province in which you are applying, and have a qualifying property to secure the loan. There are four main criteria subprime lenders will look at when assessing your application:

• Income
• Down payment
• Credit score
• Type of property 

You’ll also need to provide much of the same documentation such as:

• Identification 
• Proof of Canadian Residency 
• Income documentation such as pay stubs, employment letters, income tax returns or notice of assessments 
• Other financial documents proving assets and liabilities 
• Information on the property you wish to purchase 
• Down payment

Since the majority of people who turn to subprime lenders have riskier profiles, subprime mortgages often have higher interest rates. You can expect rates to be anywhere from 1-3% higher than traditional mortgage rates, or more depending on your credit score.

Subprime lenders typically don’t finance high ratio mortgages, so expect to provide a down payment of at least 10% or more of the value of the property you wish to purchase. 

Rates & Fees

Your exact mortgage interest rate will depend on your unique financial situation such as your credit score, income, debt to income ratio, employment history and the type of property you wish to purchase. As always, the better the credit score the better the rate. Subprime mortgages are no exception.

Subprime mortgages also tend to come with higher loan origination fees, shorter amortization periods, and closed mortgage terms as short as 6 months. Be prepared for a higher monthly mortgage payment. Still, if you’ve crunched the numbers and purchasing a home will put you further ahead financially than continuing to rent,  the higher payment may still be worth it, as long as you can afford it.

Benefits of a Subprime Mortgage in Canada? 

There are many benefits of getting a subprime mortgage in Canada. One of the biggest benefits is that it can help you buy a home even if you have poor or bad credit. Another benefit is that these loans typically have lower down payment requirements than other types of loans. Additionally, the interest rates on these loans are often lower than the rates on other types of loans designed for people with bad credit.

Downsides of a Subprime Mortgage in Canada? 

While there can be benefits to a subprime mortgage, there are also some downsides. One downside is that you may end up paying more interest over the life of the loan because of a higher interest rate. Additionally, if you default on your loan, you could lose your home just like with any other type of mortgage loan.

Is a subprime mortgage right for you?

Normally, if you don’t meet the basic qualifications for a mortgage through a traditional lender then you probably shouldn’t buy a house. 

Having said that, many Canadians find themselves in a unique grey area where purchasing a home would actually be financially advantageous, but for various reasons, they don’t qualify by conventional standards. 

Those with bankruptcies in their past, in my personal opinion, are prime candidates for a mortgage through a traditional bank. They have experienced financial trauma, learned from it, were required to complete a financial literacy course and now have critical debt management and personal finance skills. Bankruptcy is a traumatic experience not likely to be repeated again, but sadly I do not make the rules. 

Also, it’s a much different labour market today than even just a few years ago. Now, more Canadians are self-employed or working atypical, unconventional jobs. That can make their income inconsistent and difficult to verify. 

And we can’t overlook the tiny home trend taking North America by storm. Many people are sick of renting but don’t want the long-term expensive commitment of a traditional mortgage on a cookie-cutter house. Still many banks won’t finance tiny homes or alternative houses like small a-frames, houseboats, or converted shipping containers.

Conclusion

While there used to be a stigma attached to subprime mortgages, that’s not the case anymore. Subprime, B lenders are filling a critical need in the lending market. Hardworking Canadians with the capacity to repay their debts are finding themselves turned away from traditional banks.

Without B lenders to fill the gap, atypical borrowers would fall through the cracks, unable to access the real estate market. Subprime mortgages are helping more Canadians secure stable and affordable housing. 

At the end of the day, a subprime mortgage isn’t forever. Ideally, you want to date your B Lender, not marry them. You can use your subprime mortgage to help rebuild your credit, pay down your debt and shore up your financial stability. Once you meet the lending requirements of traditional lenders, you can transfer your mortgage and finally get the great rate you deserve.