Portrayed by the media as the cause of the U.S. financial meltdown, the “sub-prime” mortgage is sometimes viewed as a mortgage product provided by unethical financial professionals to high risk and irresponsible borrows. Although this may have been partially true in the past, it has never really been the case in Canada. The term subprime is more commonly used in the U.S. while we more commonly refer to this type of mortgage in Canada as an alternate, private or B-mortgage.
Subprime mortgage lending is a recent growth sector for some Canadian lenders since CMHC and the Office of the Superintendent of Financial Institutions (OSFI) have either enforced or are strongly recommending a more conservative approach to lending. Credit unions, trust companies, tier two banks and mortgage investment companies have continued to provide alternatives for Canadians to buy homes in a time when the big banks are more frequently saying “no”.
Below are three types of client scenarios Canadian mortgage advisor find subprime mortgages for:
Recently Self-Employed – When your business doesn’t have a two–three year income tax history, a subprime lender can help you. What the lender typically looks for is a business with strong sales or a tradesperson/professional with a proven track record in their industry.
Bruised/Damaged Credit –If you ran up your credit cards on a trip around the world and then walked away from the debt, not too many lenders are likely to work with you. More often than not however, personal credit can be damaged in other unexpected ways such as a business failure or a marital breakdown. Depending on the nature of your circumstances, many subprime lenders will consider you for a mortgage when you have damaged credit, if your circumstances are extenuating and explainable.
Claiming Little Income While Having Significant Home Equity – This can be the case when you have other financial resources to draw from such as investments, which can be used to support mortgage payments, if required. A typical scenario is where you own your home free & clear and want to access some of your equity without needing to sell. Equity mortgages where you can borrow up 50 per cent of the value are also available to you, as long as you have a financial game plan than makes sense to the lender. An example of this is a sole property owner with family members living in the home, contributing toward household expenses. Another example if you are over 55 year of age, is the CHIP reverse mortgage, where you make no payments until you sell your home.
There are no hard-and-fast rules guaranteeing approvals of sub-prime mortgage applications in Canada. Typically each mortgage application is approved or declined based on your individual circumstances. Working with an experienced mortgage advisor is the easiest way to determine if this type of mortgage is a good fit for you.