What Is a B-Lender Mortgage? - NerdWallet Canada

Understanding B-Lender Mortgages

If the chartered banks, or A-lenders, turn you down for a mortgage, there’s an entire industry of B-lenders you can turn to for your financing needs.

B-lenders fill an important gap in Canada’s tightly regulated mortgage market. If you’re turned down for a home loan by one of the country’s A-lenders, like a Big Six bank or credit union, a B-lender mortgage can keep your homeownership dreams alive.

B-lender mortgages are intended for borrowers who can’t meet the qualification requirements of A-lenders, so the costs and conditions involved can make them more expensive. Understanding how a B-lender mortgage works is a must before you apply for one.

What is a B-lender?

B-lenders, sometimes called subprime lenders, are financial institutions that specialize in mortgages but are not regulated to the same extent as A-lenders. Because they don’t adhere to the standards put in place for chartered banks like RBC, TD or Scotiabank, B-lenders can be more flexible in who they lend to and the terms they offer.

A-lenders, for example, are required to stress test their mortgage applicants and ensure their debt service ratios are below established limits. B-lenders do not have to stress test their clients and have more leeway where debt levels are concerned. This allows them to lend certain borrowers more money than they might get from an A-lender.

Note that B-lenders will work with you even if you can get approved for a mortgage at an A-lender. In many cases, that “B” refers to the borrowers a lender is willing to work with — still creditworthy, but not an obvious slam dunk as a mortgage client.

The differences between A-lenders and B-lenders

There are three main areas where B-lenders might diverge from A-lenders. The B-lending industry is fairly diverse, so these differences might be more pronounced at some institutions than at others.

Qualification guidelines

B-lenders are generally more lenient when it comes to qualifying borrowers. They place less emphasis on a person’s credit score and debt ratios, and may not view incidents like a past bankruptcy as a dealbreaker.

B-lenders are less strict than A-lenders regarding borrower income, and might be be more willing to approve you for a large mortgage if you’re self-employed or have sufficient but inconsistent income. B-lenders are also more accepting of non-traditional income and down payment sources, like inheritances, bonuses and commissions.

One reason B-lenders can take on additional risk is because of their high down payment requirements, which help them loan smaller amounts. It’s not unusual for a B-lender mortgage to require a 20% down payment.

Range of products

Some B-lenders offer standard products like closed, fixed-rate mortgages, but they’re also known for providing a wide range of customizable products. This allows them to craft financing solutions for borrowers with unique circumstances.

B-lenders might, for example, offer mortgages meant specifically for self-employed borrowers, new arrivals to Canada, first-time buyers or people purchasing property abroad. B-lender mortgages, however, typically come with shorter term limits that max out at three years.

Costs

Another way B-lenders hedge against the added risk they take on is by charging higher mortgage interest rates.

The rate on a B-lender mortgage might be up to 2% higher than what an A-lender charges on a similar product. You may also have to pay a B-lender a fee equal to 1% of the loan amount, as well as other unique fees. Ensure you understand all the costs associated with a B-lender mortgage before signing one.

Where can you get a B-lender mortgage in Canada?

Monoline lenders

Some of the biggest B-lenders in Canada are monoline lenders, or non-bank financial institutions that only provide mortgage products. Monoline lenders work with borrowers across the creditworthiness spectrum, and are popular options for those passed over by A-lenders.

Large Canadian monoline lenders include:

First National Financial.
MCAN Home Mortgage Corporation.
MCAP.
Merix.
CMLS Financial.
Radius Financial.

» MORE: See our list of Canada’s best mortgage lenders for bad credit

Credit unions

Credit unions are typically considered A-lenders, though they may sometimes provide mortgages for people who can’t qualify at a big bank. Because they are provincially, and not federally regulated, credit unions might allow you to forgo the mortgage stress test, a useful workaround that other A-lenders can’t offer.

Private lenders

Private lenders range from large institutions, like mortgage investment corporations, to individuals looking for a quick return on their money. Smaller private lenders face even fewer regulations than other B-lenders, which means their clients can encounter unexpected fees, unique conditions and much higher interest rates. Because of the risks involved, getting a mortgage from a private lender is generally considered a last resort.

Who should consider a B-lender mortgage?

Canada wouldn’t need B-lenders if everyone could walk into their local bank branch and get approved for a cheap, hassle-free mortgage. But there are several borrowers for whom a B-lender mortgage might be the best — or only — option, including:

New arrivals to Canada. You might come to Canada gainfully employed and up to your ears in savings, but with no Canadian credit history, an A-lender may not approve you for a home loan.
People with bad credit. A low credit score or badly blemished credit profile could quickly disqualify you from getting a mortgage anywhere but at a B-lender.
The self-employed. Being your own boss can create challenges in demonstrating to A-lenders that you earn an adequate, consistent income.
Real estate investors. Some B-lenders offer mortgages specifically designed for funding investment purchases.

How to get approved for a B-lender mortgage

B-lenders might have more lenient standards when evaluating borrowers, but those standards still exist. You’ll have to make a strong case for yourself when applying for a B-lender mortgage, just as you would when applying for a mortgage with an A-lender.

Get your down payment ready

Providing a 20% down payment might require you to tap multiple income sources, like investments, savings accounts or money from your family. Documenting the amounts and providing a schedule for consolidating them can save time and give your lender confidence that your down payment is where it needs to be.

Explain your situation honestly

If a period in your life has scarred your finances or credit profile — bankruptcy, a gambling addiction, a messy divorce — having an honest, open conversation with your lender about it can confirm that what happened was a blip in an otherwise clean financial history. B-lenders might put more faith in a years-long upward trajectory than they do into an isolated bump in the road.

Have a plan for tackling your credit issues

B-lenders typically offer mortgages of three years or less. Once your term concludes, you’ll be expected to renew your mortgage at an A-lender. But if you come to a B-lender with unsalvageable credit, or no plan for getting your finances in order, they’ll question whether you’re a good candidate for any mortgage.

It’s not necessary to provide a B-lender a detailed strategy for getting out of debt; that’s something your mortgage broker should help you with. But the earlier you start strengthening your finances, the better your chances of getting approved for a B-mortgage now, and an A-mortgage later.

Also known as subprime lenders, B-lenders provide funding for homeowners and home buyers who don’t qualify for mortgages at chartered banks. Because B-lenders are not federally regulated, they have more lenient standards regarding a borrower’s credit history and income sources.

If you can’t get a mortgage from an A-lender, getting one from a B-lender can be a solid second option. You might pay more in interest and fees than if you were borrowing from an A-lender, but you may also be offered a customized loan that better fits your financial situation. B-lender mortgages typically last three years or less, so you may only pay a higher interest rate for a fraction of your mortgage’s amortization period.

Understanding B-Lender Mortgages

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