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Canada Subprime Mortgage Explained

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The major lenders in Canada have stringent eligibility criteria for mortgage loans. The credit score is the most important consideration they make when determining whether to give a mortgage. However, you could still miss out on a mortgage, even with a good credit score, if you are self-employed. While there are self-employed mortgages by major banks, banks often require that you provide proof of income going back 2 years, which is not always easy. Subprime mortgages are also sometimes the only option available to those with low income, non-traditional incomes such as seasonal income and commission income, foreign residents, and those with high debt levels.

If you have been rejected by an A (prime) lender for whichever reason, do not lose hope. There are B (Subprime) lenders and private or syndicate lenders that can still make your journey toward homeownership a reality. Mortgages offered by B (Subprime) lenders are called subprime mortgages.

Are subprime mortgages still used today? Despite the higher interest rates, you will be surprised that 12% of Canadian mortgages are subprime mortgages (according to TransUnion Canada statistics). The statistics also show that a third of Canadians’ credit scores are “below prime.”

While A-Lenders such as the major banks have to follow strict government regulations, subprime mortgage lenders do not have to follow government regulations. For instance, subprime mortgage Canada lenders can offer long amortization periods of up to 40 years and LTV (loan-to-value) of 90% (or a down payment of as little as 10%).

Below is a list of B mortgage lenders in Canada. Note that some of these lenders, such as CMLS Financial, also double up as A-lenders.

  • Canadian Mortgages Inc. (CMI)
  • Bridgewater Bank
  • CMLS Financial
  • The Effort Trust Company
  • Fisgard Asset Management
  • CWB Optimum Mortgage
  • MCAP Mortgage Corporation
  • Haventree Bank
  • First Swiss Mortgage
  • Marathon Mortgage
  • Mercury Mortgages
  • New Haven Mortgage Corporation
  • Secure Capital Mortgage Investment Corporation Inc.
  • XMC Mortgage Corporation

In this article, we shall look at what subprime mortgages are and how they are different from prime mortgages. We shall discuss the advantages and disadvantages of these mortgages and see the services offered by B lenders. You can go directly to a B lender or enlist the services of a mortgage broker for assistance. We shall discuss the merits of hiring a pro for the job and the process of getting a subprime mortgage through a mortgage broker.

Understanding Subprime Mortgages

SUBPRIME MORTGAGES
Private financial institutions
Higher rates
Not the major consideration
Possible to get a long amortization period (up to 40 years)
As little as 10%
VS
LENDER
RATES
CREDIT SCORE
AMORTIZATION
PERIOD
DOWN PAYMENT
PRIME MORTGAGES
Chartered banks and credit unions that are FRFI
Lower rates
At least 680
Non provided
At least a 20%

A subprime mortgage, also known as a “B lender” mortgage, is a mortgage given to individuals who cannot qualify for prime or “A lender” mortgages. These mortgages usually come with a higher interest rate compared to what is offered by “A lenders” due to the increased risk. They are meant for:

  1. Individuals with a poor credit score: A lenders are required to only lend out to individuals with a credit score of over 680.
  2. Self-employed individuals: A lenders have mortgage products meant for self-employed individuals, but there are strict requirements on offering proof of income such as pay stubs or T-slips over 2 years. This shuts out new business owners and those who cannot provide proof of income for one reason or the other. The income tax deductions of some self-employed individuals sometimes also make their income look gloomy on paper.
  3. Individuals with unconventional sources of income: Borrowers who have unconventional sources of income, such as investment income, commission income, freelance income, and disability income, usually have a problem getting mortgages from A lenders. A lenders only lend to those who can provide standartized pay stubs.
  4. Individuals with a low income: If you have a low income, lenders will see you as having a risk of defaulting.
  5. Individuals buying alternative housing: Banks and credit unions will only offer mortgages for conventional homes. If you are going for a tiny home, a houseboat, or a mobile home on rented land, you will not qualify for a mortgage from an A lender.
  6. New Canadians: It takes time to build up your credit score. This is because 35% of the score is based on your credit history. If you are new to Canada and need to invest in a home, consider getting a subprime mortgage.
  7. Individuals with a bankruptcy history or with a consumer proposal: If you have filed for bankruptcy or have undergone a consumer proposal, you will need to wait between 1 ½ and 2 years to get a conventional mortgage or CMHC-insured mortgage from an A lender. You can get a mortgage from a B lender even within 1 year after the discharge date.
  8. Individuals with a high Debt-to-Income (DTI) Ratio: If you have high debts, lenders will shy away from you since you may be stretched too thin to meet your monthly repayment obligations. If you want to get a mortgage from an A lender, you either have to reduce your debts or increase your income.

What is the explanation of the subprime mortgage crisis?

When most people hear about subprime mortgages, they immediately think of the 2008 subprime mortgage crisis that started in the U.S. and spread to the rest of the world. This still makes many would-be beneficiaries shy away from getting a subprime mortgage.

Subprime mortgage crisis explained

The subprime mortgage crisis in the U.S. was primarily caused by lenders giving mortgages to borrowers who could not afford to make their monthly repayments. Hedge funds and banks were making a killing by bundling these subprime mortgages into MBS (Mortgage-Backed Securities), which were then “insured” with CDS (Credit Default Swaps) and sold to investors. The majority of the mortgages had adjustable interest rates, starting with low initial rates, which would rise with time, leading to a high default rate. The failure to vet borrowers, the variable interest rates, the use of MBS sale incomes to get more borrowers, and the high demand for MBSs created a time bomb. The bomb finally burst when the housing bubble, characterized by home prices tumbling and foreclosures increasing, started.

Canada was lucky to escape the crisis, mostly due to the more stringent mortgage regulations in the country. Mortgage LTV (loan-to-value) ratios in Canada were much lower compared to the U.S. While the median LTV of new subprime mortgages in the U.S. was 100% in 2005, only 6% of Canadian mortgages had LTV over 90%. Subprime lending in Canada remains properly regulated, and there is little cause for alarm.

How Subprime Mortgages Differ from Prime Mortgages

  • While prime mortgages are offered by Chartered banks and credit unions that are federally regulated financial institutions (FRFI), subprime mortgages are offered by private financial institutions that are not regulated by the same regulatory framework.
  • Subprime mortgage rates are higher compared to prime mortgage rates because of the risk subprime mortgage lenders have to take with less creditworthy individuals.
  • Subprime lenders have more relaxed rules when it comes to the credit score. While you need a credit score of at least 680 to qualify for a prime mortgage, your credit score is not the major consideration for subprime mortgages.
  • It is also possible to get a long amortization period (up to 40 years) with a subprime lender.
  • Some subprime lenders ask for a down payment of as little as 10%. You usually need at least a 20% down payment with most A lenders.

Pros And Cons Of Subprime Mortgages

SUBPRIME MORTGAGE
  • Assisting Individuals with a Bad Credit Score to Buy Homes
  • Assisting Individuals who do not Meet A Lenders' Eligibility Criteria to Buy Homes
  • Assisting Individuals with a Bad Credit Score to Buy Homes
  • Helping Individuals Improve their Credit Score
  • Capped Rates
  • Less Waiting Time in Case of Bankruptcy
  • Assisting New Canadians to Own Homes
  • Higher upfront and overall costs
  • Longer amortization periods
  • Higher Interest Rates

Are subprime mortgages still available? Although there has been a lot of stigma against subprime mortgages since the 2008 U.S. foreclosure crisis, subprime mortgages are still popular, with 12% of all mortgages in Canada being subprime mortgages.

What was the problem with subprime mortgages? The 2008 subprime mortgage crisis began with rock-bottom interest rates combined with lax lending standards. This created a housing bubble. The bubble burst in 2008, leaving banks with useless subprime mortgage investments (collateralized debt obligations or CDOs and mortgage-backed securities or MBSs) worth trillions of dollars. This caused an unprecedented recession that cost many people their homes, jobs, and savings.

The most impacted economies were the U.S., Ireland, Greece, Portugal, and Spain. Canada’s subprime mortgages have not experienced similar issues, mostly due to the stricter regulations in the country. Canadian banks have always been leery about investing in highly leveraged and complex instruments that are tied to subprime mortgages.

Canadians who are denied mortgages by prime lenders like chartered banks are credit unions have the option of getting mortgages from subprime mortgage lenders.

Subprime Mortgage Advantages and Disadvantages

What are the advantages of subprime lending?

    1. Assisting Individuals with a Bad Credit Score to Buy Homes
      There are strict regulations governing prime lenders (banks and credit unions). The most important of these is the credit score. If your credit score is less than 680, you will not get a mortgage from an A lender. B lenders, however, can offer loans to individuals with poor credit scores.
    2. Assisting Individuals who do not Meet A Lenders’ Eligibility Criteria to Buy Homes

Other than the credit score, A lenders have other eligibility criteria. These include:

Proof of income stability and meeting debt-to-income ratio threshold: If your income is not stable or you are heavily in debt, lenders will see you as being a default risk. B lenders can lend to individuals with poor DTI ratios. They are also able to lend to individuals with unconventional income sources, such as freelance income, commission income, and disability income.

20% down payment: A lenders usually require a down payment of 20% of the home’s purchase price. Any down payment below 20% requires CMHC insurance. If you do not have this amount and do not qualify for a down payment assistance program (DPAP) such as a first-homebuyers’ incentive, a subprime lender is your best option since they take as low as a 10% down payment.

Proof of income: Self-employed individuals have to prove their income for 2 years. This means those who are newly self-employed cannot get mortgages from A lenders.

The stress test: You must prove that you are able to afford 2% over the current Bank of Canada 5-year benchmark rate.

  1. Assisting Individuals in Buying Non-Conventional Homes
    Credit unions and A lenders are very specific about the types of homes they give mortgages for. If you want to invest in a tiny home, a mobile home, or a houseboat, a subprime mortgage lender is your best bet.
  2. Helping Individuals Improve their Credit Score
    If you get a subprime mortgage and you are able to meet your monthly repayment obligations, you will start noticing an improvement in your credit score.
  3. Capped Rates
    Despite popular belief, subprime mortgage lenders are not predatory, thanks to government regulations that set limits on applicable interest rates, which make predatory lending an offence under the Criminal Code of Canada. Subprime mortgage interest rates are lower than other loans designed for people with bad credit.
  4. Less Waiting Time in Case of Bankruptcy
    If you are recovering from bankruptcy, you typically have to wait between 1 ½ and 2 years to get a mortgage from an A lender. This period is much shorter (typically 1 year) with subprime mortgage lenders.
  5. Assisting New Canadians to Own Homes
    New Canadians who have not worked on their credit score yet are able to benefit from subprime mortgages.

What are the disadvantages of subprime lending?

  1. Higher Interest Rates
    Subprime mortgage lenders offset the risk they take on borrowers who are less creditworthy and who have other financial difficulties by charging higher interest rates.
  2. Higher upfront and overall costs
    The fees and closing costs are usually higher with subprime loans. Since you will be paying a higher interest rate, the overall cost of the loan will be higher, and you will be paying higher monthly repayments.
  3. Longer amortization periods

Subprime lenders in Canada offer terms that stretch to even 40 years. This means you will spend a big chunk of your life making mortgage payments.

Given the higher cost of subprime mortgages and the fact that the loan helps improve your credit score over time, consider starting off with a subprime mortgage and then transferring your mortgage to a prime lender once you have fixed your credit score.

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Our Subprime Mortgage Services

...pick the one thats right for you.

We help you with picking between different types of subprime mortgages.

There are 3 options when it comes to subprime mortgage rates in Canada. What works for one person may not work for the other. We will help you determine what works best for you.

  1. Subprime Fixed Rate Mortgages: These mortgages are charged a fixed interest rate, and the monthly repayments are fixed for the duration of the mortgage. This is a popular option for those who do not want to deal with the uncertainty of prime lending rate fluctuations. The downside is that you will not benefit from prime lending rate decreases. Fixed-rate mortgages can last up to 50 years.
  2. Subprime Adjustable Rate Mortgages (ARMs): These mortgages have interest rates that vary depending on the prime interest rate. The monthly repayments can, therefore, go either up or down. This subprime mortgage in Canada usually has a shorter amortization term of not more than 30 years. Popular ARMs are the 3/27 and the 2/28 ARMs, with the former meaning a flat interest rate for the first 3 years and a variable interest rate for the other 27 years. There is usually a cap on how high the interest rate can go.
  3. Subprime Interest-Only Mortgages: With these mortgages, you begin by paying off the interest. Once you are done, then you begin paying off the principal. These subprime mortgage rates are usually cheap to start with and get more expensive after the lapse of the introductory period, which is typically 7 to 10 years.

Help to Choose Between Subprime Lenders in Canada

What is a subprime bank? There are many subprime lenders operating in Canada. They include Canadian Mortgages Inc. (CMI), Bridgewater Bank, Effort Trust, CMLS Financial, CWB Optimum Mortgage, Fisgard Asset Management, and MCAP Mortgage Corporation. Others are Haventree Bank, First Swiss Mortgage, Marathon Mortgage, Mercury Mortgages, XMC Mortgage, New Haven Mortgage, and Secure Capital Mortgage, among others. Different lenders have different requirements. We will help you find the lender who is best suited for your particular circumstances.

Help to Meet the Lender’s Eligibility Criteria

The characteristics of a subprime mortgage borrower are a poor credit score, a debt-to-income (DTI) ratio greater than 0.5, poor credit history, bankruptcy in the past 2 years, foreclosure, judgment, repossession, or charge-off in the past 2 years, a retiree, a new business owner, or a self-employed individual. However, this is not to say they give mortgages to everyone who comes knocking. We will help you meet the eligibility criteria of subprime mortgage lenders. These include:

  • Identity Verification: You will need to verify your identity by providing your SIN number and a government-issued ID that contains your current address.
  • Proof of income for salaried individuals: The lender needs to confirm you can meet your debt service ratios. Your income should be such that the monthly mortgage payments do not exceed 39% of your gross income. If you are employed, you will need to provide a T1 general tax form, Notice of assessment (NOA), letter of employment, TA or T4A tax forms, or recent pay stubs.
  • Proof of income for self-employed individuals: Lenders consider self-employed individuals to be riskier. You will need to provide proof of income going back 2 years and show a business licence or articles of incorporation.
  • Proof of income for rental properties: You can include your rental income in your mortgage application. You will need to provide lease or rent agreements.
  • Closing costs: You will need to pay closing costs, which are one-off fees that are usually 3 to 4% of the purchase price.
  • Basic financial information: Your lender will get your credit score from one of the 2 credit bureaus. You will, however, need to provide a mortgage pre-approval letter, bank statements, and a list of investments and assets.
  • Down payment: Lenders require you to pay a down payment. It helps you confirm if your mortgage is insured or uninsured. You will need to provide a statement of investments or savings which proves that your down payment is liquid. This document should not be older than 90 days. If you are getting your down payment from the proceeds from selling your current home, you will need your old home’s sale agreement. If you are a first-time homebuyer, you can get up to $35,000 from your RRSP to use as your down payment. These funds are to be repaid back to the fund within 15 years. You will need to provide proof of this withdrawal. If you are getting the down payment as a gift, you will need to provide a gift letter indicating that the funds are a gift, not a loan, the name of the giver, and the amount gifted.
  • Property details: Your lender will need to see details of the property you are buying. The information required includes a legal description of the home, a final purchase and sale agreement, and homeowners’ insurance policy. You will also need to provide lenders’ title insurance.

Help with Debt Consolidation

One of the most important factors any lender considers, be it a prime or a subprime lender, is your credit score. One of the ways to improve your credit score is to do debt consolidation. Debt consolidation simplifies your payments, allows you to pay off debt sooner, and can lower your interest rate. Consolidation options include consumer proposals, debt settlement programs, debt management plans, and refinance with debt consolidation loans.

FAQs

Does Canada have subprime mortgages?

Yes. Although there has been a stigma around subprime mortgages since the 2007/2008 subprime mortgage crisis (housing bubble) in the U.S., subprime mortgages are still popular, with 12% of all mortgages in the country being subprime.

What was the problem with subprime mortgages?

The major drawback of subprime mortgages is their higher interest rates compared to prime mortgages. The higher interest rates are because lenders have to take greater risks with borrowers who are less creditworthy. Subprime mortgages also have a longer amortization period (40-year amortization period is not uncommon), and the upfront costs are usually higher.

What are the pros and cons of a subprime mortgage?

Subprime loans allow Canadians who would otherwise not get loans from prime lenders to fulfill their dreams of home ownership. These mortgages also help improve the borrower’s credit score. The cons of subprime mortgages are the higher interest rates, the more expensive upfront cost, and the longer amortization period.

What is the subprime interest rate in Canada?

Subprime mortgage interest rates vary from one lender to the other and from one borrower to the other. You expect to pay between 6.99% and 11.99% today, but this rate may go higher if your financial situation is very bad. There is a cap beyond which lenders cannot charge you.

Who are subprime mortgage buyers?

Subprime mortgage buyers are Canadians who have poor credit scores (typically below 680), individuals who are self-employed and cannot provide proof of income, and those with unconventional incomes, such as those earning freelance and commission incomes. Others are individuals with high debt-to-income (DTI) ratio, new Canadians who are yet to work on their credit score, individuals with low incomes, and individuals who are buying unconventional homes such as boathouses, mobile homes, and tiny homes. If you have had a consumer proposal, a debt management plan, a bankruptcy, a foreclosure, a judgment, or a repossession, a subprime mortgage allows you to get a loan without waiting for the 2-year waiting period.

Is a subprime mortgage a mortgage?

Yes. A subprime mortgage is a mortgage just like any other. You will still need to provide a down payment, and you will still need to prove to the lender that you are able to meet your repayment obligations.

Are subprime mortgages ethical?

Yes. Subprime mortgages play an important part in the Canadian economy as they help people who would otherwise never own homes to do so. The industry is heavily regulated to reduce the risk of a foreclosure crisis, as experienced in the U.S. in 2008. There are also interest rate caps put in place to ensure lenders are not predatory.

How can I avoid subprime mortgages?

If you do not qualify for a prime mortgage, a subprime mortgage is your best bet. As you service your mortgage, your credit score will improve, and you can then transfer your mortgage to a prime lender for better terms.

Are subprime loans higher risk?

Considering that these loans are reserved for individuals with poor credit scores and who have other financial problems, such as a history of bankruptcy and non-conventional incomes, these loans are riskier. Lenders protect themselves by charging higher interest rates. It is important to note that the Canadian subprime mortgage market was not hit even in 2008 due to the strong regulatory environment. The regulator continues to have stringent controls to date.

What makes a mortgage subprime?

The term “subprime” indicates that the borrower is less creditworthy and therefore is at a higher risk of defaulting on a mortgage. The major basis for this is the borrower’s credit score.

What is the subprime credit score in Canada?

The Canada Mortgage and Housing Corporation (CMHC) puts the minimum credit score requirement at 680 – anything below this is considered subprime. Visit Equifax or TransUnion to confirm your current score.

What are the eligibility criteria for subprime mortgages?

To qualify for a subprime mortgage, you will need to verify your identity, provide proof of income, and provide basic financial information such as bank letters. You will need to pay a down payment, provide details of the property you want to buy, and pay closing costs.

What types of interest rates are available with subprime mortgages?

Just like with prime mortgages, most borrowers either go for fixed mortgages or adjustable-rate mortgages (ARM). Fixed mortgages are usually longer, going up to 40 years, while ARMs usually go up to 30 years. There are also interest-only mortgages, where you first pay off the interest before you can start paying the principal.

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Getting Started with Our Subprime Mortgage Services

You first need to ensure you meet the general eligibility criteria. You will need to prepare all the documentation before you visit potential lenders. The eligibility criteria include personal information, including your SIN and ID, proof of employment or income, bank statements, and other documents showing your assets and liabilities. You will also need to provide a down payment and details of the property you wish to buy. At Turkin Mortgage, we will assist you in getting all the relevant documents and information in place.

Once we understand your particular requirements through the initial consultative session, we will then assist you in picking the interest rate that best suits you. Available subprime mortgage rates include fixed-rate mortgages, adjustable-rate mortgages (ARMs), and interest-only mortgages. Each option has pros and cons worth careful consideration.

There are several subprime mortgage lenders available to choose from. We will match you with the most suitable lender based on your particular needs and circumstances. If your credit score is too poor or you have other financial issues, you need a professional who has a relationship with different lenders to increase your chances of getting a mortgage at a good rate. Hiring us offers unparalleled convenience since you don’t have to go from one lender to the other looking for a mortgage loan, and it ensures you get a credible lender.

We understand that some clients’ financial woes are too bad, even for subprime lending. We offer services that help clients improve their financial situations before they can go for subprime mortgages. Our debt consolidation service helps you repay your debts quicker, leading to lower interest rates, and it makes debt repayment convenient.

On our website, you will be able to see the rates that different providers are offering at a glance. We also have different calculators to help you determine how much you expect to pay with different types of interest rates over different amortization periods.

We are based in Toronto but serve clients in the Greater Toronto Area. Other than helping you with subprime mortgages, we also offer other services like mortgage refinance, mortgage transfer, home equity takeout, and U.S. mortgages for Canadians, among others. We have a good track record, and our rates are very competitive. You stand to win an iPad or $1,000 when you close with us. Call us today at +1 866 921 8890 to start your journey towards getting a subprime mortgage. Our agents are available around the clock.