Did you know there are 3 different types of Mortgage Lender in Canada?
“A” Lenders take on low risk mortgages, “B” Lenders take on medium risk mortgages, and “C” Lenders take on high risk mortgages.
Let’s start with ‘A’ Mortgage Lenders
These are exactly who you think they are, all your Big Banks, your Credit Unions and ‘A’ Monoline Lenders. Monoline Mortgage Lenders are the best of the bunch IMO (that debate is for another blog though), they are the lenders that Mortgage Professionals such as myself can access to get clients the best mortgage possible. They are massive billion-dollar companies that only do lending and only market to mortgage brokers. Two of the best Monoline Lenders are
‘A’ Lenders want you to have good established credit, they want you to meet all the federally regulated debt servicing ratios, and they want a good quality property. They don’t want much risk. This is where you will find the best interest rates as well, and it makes sense, less risk for the lender, better rate for the client. These are the lenders you want to deal with in a perfect world.
Now we will move onto ‘B’ Mortgage Lenders
‘B’ Lenders are basically ‘A’ Lenders with lower standards. Lower credit scores are acceptable, and they’ll let you stretch out the debt service ratios, that basically means they will let you spend a higher percentage of your income on your mortgage.
There are a few catches here though, the obvious one is that the rates are higher. How much higher? 1% to 2% higher than what the going ‘A’ rate is. The second catch is that you need to have ATLEAST 20% equity, so you can only finance 80% of the property. This is for two reasons…
- To protect themselves. In the event that they need to foreclose, the likelihood that the sale of the home will recoup all their funds is much higher the smaller percentage of value they lent you. We call this Loan to Value, or LTV for short.
- Because ‘B’ lenders can’t lend over 80% LTV without mortgage default insurance (I wrote another blog on what that is, you should check it out, https://dennismcnish.ca/what-the-heck-are-cmhc-fees-why-do-i-have-to-pay-them-and-how-much-are-they/ people usually call this CMHC fees).
The third catch is that these lenders won’t just lend anywhere. They want “marketable” locations, so that basically means cities, small towns are out.
You want to use a ‘B’ Lender when you just can’t get a loan from an ‘A’. Maybe your spouse isn’t working so you can’t qualify on just one income. Maybe you had something go off the rails and your credit rating is to low. Perhaps you just want to spend more then you technically qualify for with traditional debt service ratios. There are lots of reasons to use a ‘B’ when using a Mortgage Lender.
And finally ‘C’ Mortgage Lenders
‘C’ Lenders are also called ‘Private Lenders’. It’s exactly what you think it is, very low standards, very high interest rate, like 5 % above ‘A’ rates. Still nowhere near your credit card though! They are called private lenders because they are often small ‘private’ companies. Sometimes they are just a single person who agrees to lend you money to get you out of your pickle. For the most part you want to avoid using a private, but you can’t undo the past, so they come in very handy sometimes. Unfortunately, it’s a fact becoming more common that people just get buried in debt and no lender will touch them. That’s where the Private comes in.
They have other practical uses too, house flippers use them to buy fixer uppers and get it flipped in a few months. We use them to pay old CRA debts as well because mortgage lenders won’t lend to people that owe big taxes. The key to getting a private deal to work is the value of the property and the LTV of the loan. Debt service rations don’t even matter, and the client is commonly ‘high risk’, so there needs to be certainty that the funds can be recouped from the sale of the property. If the LTV is low enough, I can find anyone a mortgage lender.
The three types of mortgage lenders… A, B, and C. Three tiers of risk with interest rates to compensate for the risk.
That about covers it! Thanks for your time, I hope you enjoyed the read!
Centum Mortgage Professional