With mortgage regulations ever-changing and becoming more stringent on borrower qualification, more and more Canadians are finding it harder to qualify for a traditional mortgage. Consumers who do not qualify for a traditional mortgage are increasingly turning to alternative lenders for their borrowing needs.
What are the newest mortgage regulations?
As of January 1, 2018, the newest regulations – called the B-20 rules – are in effect. The main change of the B-20 rules is the addition of the mortgage “stress test”, which requires all conventional mortgages (borrowers with a 20% down payment or equity in the home) to qualify at the greater of the Bank of Canada (BoC) Benchmark rate of 5.14%, or the contract rate plus 2%. The contract rate would be the rate which you are receiving during financing.
What does this mean for my upcoming renewal?
If you are a current mortgage holder, these changes do not directly impact you until the time comes to change your mortgage. If you do not need to refinance for a better rate or consolidate any debt, you can re-sign with your current mortgage lender on a new term.
What if I need to refinance, or the bank isn’t offering the best rate?
If you are looking to consolidate your high interest credit card debts, withdraw funds for a renovation, or just want to get the best rate, a refinance could be what you are looking for. When it comes to qualifying, you will have to do so under the new regulations, which is to say qualifying at over 5%! This is significant, as even the slightest bit of debt can push homeowners over the line of qualifying for a traditional mortgage.
What are alternative mortgage lenders?
Alternative mortgage lenders have the ability to look beyond traditional lending guidelines to qualify borrowers. This means if a traditional lender cannot approve you due to lack of income, poor credit history, or debt load, an alternative lender could be an option.
Alternative lenders give you the opportunity to reduce your overall debts and rebuild your credit. This of course comes as a risk to the lender, and they in turn pass this risk onto the client in the form of a higher interest rate. Interest rates can vary with alternative lenders from 5-15% based on individual financial situations.
Every time there are new mortgage regulations, new trends emerge that affect both consumers and the industry. With the B-20 mortgage rules introducing a higher qualifying interest rate, an estimated 20% of Canadians may no longer qualify traditionally and therefore turn to the alternative lending market – a market that didn’t exist in such a capacity prior to these newest mortgage regulation changes.