What is a subprime mortgage? This is one of the commonly asked questions among potential homeowners. Usually, when an individual has a low credit score, accessing loans and mortgages becomes very difficult. Qualifying for conventional mortgages in Toronto or Canada in general also becomes impossible, and that is where subprime mortgage loans come in.
A subprime mortgage provides relief to people whose previous spending patterns and ability to pay off loans are questionable. The word ‘subprime’ points to the borrowers and their financial circumstances and not the loan itself.
So, how does a subprime mortgage work? Subprime mortgage Canada lenders take a big risk by giving out loans to this category of individuals. The low credit rating is an indication that they are likely to default on the loan. As such, lenders tend to charge very high interest rates to cover part of the risks they are taking. Therefore, do not expect interest rates within the prime lending rate when applying for the subprime mortgage.
Understanding what a subprime mortgage is, also becomes easier when you know about prime mortgages, which are property loans given by credit unions, big and mid-sized banks. They are regulated by the federal government. As such, they have lower interest rates than other types of non-conventional mortgages. However, prime mortgage lenders are also stricter and have stringent requirements for borrowers before giving out the loans.
So, what are subprime mortgage loans? Contrary to prime lenders, subprime lenders give alternative loans and may not adhere to stringent federal policies. So, if you have a less than 600 credit score, subprime mortgages may be the best option for you.
Although the exact answer to what is a subprime mortgage Canada may differ with every person, knowing the processes involved when applying is advised.
Various types of subprime mortgage loans exist, just like conventional ones. They include:
Fixed interest rate mortgages
A fixed-rate subprime mortgage typically comes with a longer loan term between 40 and 50 years, which differs from the 15 to 30-year loan terms that conventional mortgages offer. The interest will be paid during the duration of the mortgage, with the amount remaining the same throughout. The extended period reduces the amount to be paid every month, but the interest is likely to be higher. The rates may still differ with every lender, which means you can get a better deal when you compare lenders and calculate the interest rate before accepting the loan.
Also known as ARM, this is one of the subprime mortgage loans that start with a fixed rate but turns into a floating rate within the term of the loan. The introductory rate is usually lower, but it increases with the market index over time. For example, with a 5/1 ARM, the interest rate for the first five years will be lower, but it can double or triple in the next 25 years of the mortgage term. 3/27 ARM also starts with a fixed interest rate for the first five years before it is adjusted to a variable rate.
The market index and margin are typically used to determine the amount. Payment during the first years of the mortgage will be lower than after the reset. After that, the amount may reduce again depending on the economic situation and the payment index, which can lower your monthly payments again.
One of the main disadvantages of this type of subprime mortgage is a reduction in property value can lead to huge losses. If home prices start to reduce, homeowners do not get the same amount they used to purchase the house but still have to pay high interest. Chances of defaulting and eventual foreclosures are, therefore, highly likely.
Interest-only subprime mortgages
With an interest-only subprime mortgage Canada, the borrower does not pay the principal amount within the first few years of the loan term. Only the interest is paid for the first 5, 7, or 10 years. You can still choose to start paying off the principal amount, but it is not mandatory. After the first term of the mortgage ends, you then start paying off the principal mortgage amount, though refinancing is also allowed.
The payment mode for these types of subprime home loans is great for those who do not have consistent income. In addition, individuals expecting to get better pay or employment opportunities in the future can also benefit from these loans.
Dignity mortgages are a new type of subprime mortgages in Ontario and are considered to be a combination of conventional and subprime mortgages. Here, the borrower can pay a down payment of 10% and agree to pay off high interest for a specified duration, which, in most cases, is five years.
If you keep up with timely payments the whole five years, the rate is lowered according to the prime rate, and the amount already paid in interest goes towards reducing the mortgage balance.
Subprime mortgage lenders are in the B category, unlike banks that are known as A lenders. The private lenders can be corporations, institutions, or individuals, and they offer subprime mortgage loans to people with low or damaged credit scores and ratings. Both the corporates and individuals use their capital for the mortgages. Some pool their resources together to get enough capital for the venture.
The subprime mortgage Canada B lenders are a good alternative to everyone turned down by the A lenders. Since people who seek subprime mortgages in Ontario are likely to default based on their credit history, these lenders charge higher interest rates. The mortgages also tend to have limited features and unfavourable terms. The higher fees are meant to cushion the lenders for the risk they are taking.
Subprime mortgage lenders may be many in Canada, but you still need to be careful about the one you accept the mortgage from. Most of the lenders are transparent and honest, but there are a few that do not operate straightforwardly. Some have been known to prey on borrowers, which is why you must vet each of them properly and compare them before signing any document. Ascertain that they have the kind of loan you need and will not charge you exorbitant fees to take advantage of your situation.
You should also look for a subprime lender that is not willing to weigh you down with the loan by giving you more than you can handle. Remember, the more you struggle to repay the subprime mortgage, the more your financial situation will worsen. Do not over-leverage yourself. Some lenders will entice you with huge mortgages that you cannot afford, and you will end up defaulting and facing more financial challenges. You may even face foreclosure and lose your property.
Do not underestimate or ignore the reputation of the subprime mortgage Canada lender you want to borrow from. These private lenders are not mandated to follow the federal regulations that conventional lenders like banks adhere to. Therefore, you have to do your due diligence by researching them and checking their reputation through their reviews. Investigate their credentials and customer support also.
What is the current subprime mortgage rate? This varies with every lender because they are not subjected to the same rules as A lenders. In some cases, the subprime mortgage rate depends on whether it is an interest-only mortgage or you also have to pay the principal amount.
When applying for subprime mortgage loans, do not expect to pay the same rates as you would with conventional mortgages. Subprime mortgage rates tend to be a little higher – between 1% and 3%. They also have additional charges such as processing fees, appraisals, and legal costs, which all contribute to higher mortgage charges.
Your lender should explain the payment structure in detail before you sign any paperwork.
Unlike the long and tedious processes involved in traditional mortgages, approvals for subprime mortgages take shorter periods. The lenders will not have to go through your credit history and check out your credit rating. They are less interested in your financial profile and more focused on the value of the property. These mortgages have been designed for people with poor credit scores or those whose qualities cannot qualify for A lender mortgages.
They give a second chance
Individuals whose applications are rejected by regular mortgage lenders can get a loan from the B lenders. You do not have to give up your homeownership dream simply because you cannot find a financial deal to help you out. Subprime mortgages can give you a chance that others won’t.
They provide the platform for rebuilding credit
Rebuilding your credit rating takes time, and paying your debts on time is one of the best ways of achieving that. But, first, you need a loan to start rebuilding your credit. Since traditional lenders will not give you a chance, the subprime lenders make it possible for you to improve your credit profile by giving you a mortgage that you pay for on time every month.
The combination of credits you have also influence your credit rating. These alternative mortgages will show your ability to manage different credit products.
Subprime mortgages can also be accessed by people whose properties do not qualify for conventional loans. For example, self-employed borrowers or those with log homes or condos may also be eligible for these B mortgages.
The interest rates that the B lenders charge are higher compared to what banks and similar institutions offer. For example, the current fixed rate for conventional loans is 3%, but unconventional lenders may charge up to 7% more to compensate for the risk they take with a borrower who does not have a perfect credit history.
More down payment
Some subprime lenders ask for down payments as high as 35%, which is also a way of protecting their investment if you default. However, it also gets challenging if the home value in the neighbourhood you are interested in keeps increasing.
Higher closing costs
The alternative mortgages have higher costs, which leads to more payment over the mortgage term. That is why you should check the mortgage terms to ensure you get a loan you can afford to pay.
Longer mortgage term
Subprime mortgages have terms ranging from 30 years to 50 years, which is longer than the conventional ones, which range between 15 and 30 years. As a result, you spend a better part of your life paying off the mortgage, with the interest rate increasing over the years.
Can you still get a subprime mortgage even if you have a credit score lower than 600 in Canada? Yes. Certified Mortgage Brokers can help you get the best mortgage products ideal for your situation.
The application process for these mortgages is different from that of conventional mortgages. First, you have to find an ideal lender, which is where mortgage brokers Toronto come in. We can show you how to get a subprime mortgage loan by helping you compare the lenders in our portfolio and choosing the most suitable one. Second, you have to check the quotes and terms offered by every lender before deciding. It is also advisable to check their background, credentials, and reputation to ascertain their legitimacy.
The next step is preparing the necessary documents such as tax returns, driver’s license, bank statements, employment contract, purchase agreement, and statement of assets and liabilities. The lender will want to assess your financial abilities on paper to determine the amount of mortgage they can give you. They may also base the mortgage terms and interest rate on your financial documents.
All the documents will have to be submitted with the application. They will show the debt-to-income ratio and loan-to-value ratio. Some subprime mortgage Canada lenders may ask for additional documents before giving the loan.
What is a subprime crisis? It is a concept that most potential homeowners think about. The crisis was experienced between 2004 and 2006, and the same seemed to threaten the Canadian housing industry recently.
According to the chief strategist and economist at Rosenberg Research, the deteriorating housing conditions in some parts of Canada were worth worrying about because it is how the subprime mortgage crisis happened. This warning came when there was a very high demand for detached homes and record-high interest rates in some of the largest markets for housing in Canada. The most hit regions were Toronto and Vancouver, but it extended to neighbouring areas like Brampton and Oshawa. The doubling prices were attributed to most people needing home office workspaces. Even Canada Mortgage and Housing Corporation missed the signs and initially called for a 9 to 18% decline in housing prices. The price-to-rent ratio and price-to-income ratio are some metrics the strategist used when calling the housing crisis. The strategist also warned about the possibility that a reduction of the domestic housing market could have a negative impact on the economy.
The situation made it impossible for people with credit scores below 640 to get housing loans, leading to the subprime mortgage crisis. Subprime lenders give individuals who cannot get loans from conventional lenders money and charge high interests to increase the chances of getting all their money back. As a result, more people with less than average scores turned to the private lenders in a bid to acquire properties, and the lenders went liberal and started giving out the loans at rates above the prime rate.
They also took over the mortgage sector by pooling resources and selling them off after repackaging. The increased number of unqualified people who could afford housing resulted in a shortage of housing and subsequent higher prices. However, when most people are struggling to manage their daily lives, handling more debt becomes impossible. As a result, more people ended up needing financing to own homes, with the number of those who could not afford to pay back the loans also increasing.
Subprime lending is back, but it is not as deeply rooted in Canada as in other parts of the world. B lenders existed even before in the country, and the subprime lending sector has also been operating. However, unlike those other regions, they are regulated and are not as widespread within the country. Despite this, Canada still experienced the global financial crisis that hit in 2007.
The situation has changed since then, with the government issuing regulations that the lenders must adhere to strict and influencing how a subprime mortgage works. Investors have also become wary of mortgage-backed securities. So, how does a subprime mortgage work? Reach out to us for details.
The economic effect of Covid-19 on the housing industry is raising concerns that the subprime mortgage loans in Canada could be a problem again. It is believed that the longer people stay out of work, the harder paying off debts becomes. Eventually, the number of people defaulting their subprime mortgages in Ontario will hit a record high as it did in 2006, which might cause a ripple effect similar to what was experienced then.
Although such a scenario is possible with subprime mortgage Canada, very few people and investors are venturing into the mortgage-backed market securities. That reduces the chances of another crisis considerably. Collateral Loan Obligations still pose some threats, but it is also minimal. Despite this, if you are wondering, can you still get a subprime mortgage in the region? The answer is yes.
It is clear that subprime mortgages carry many risks for both the borrower and the lender, but they are still the best alternative for aspiring homeowners with a poor financial profile. As an aspiring homeowner, doing thorough research to understand the possible risks is the best way to avoid them. The knowledge will help you assess your situation and ascertain whether subprime is the only viable option.
One of the disadvantages of these loans is their high costs, which increase the chances of defaulting. On the other hand, they allow people to own homes even without having high credit scores. Supporters of these mortgages have pointed out that the high interests are not indefinite. They only remain so while the borrower proves that they can pay off the debt, after which the rates reduce once the credit scores increase. By then, you could also qualify for different loans with better terms and lower interests.
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