What Is a Subprime Mortgage?

Subprime mortgages are home loans for borrowers who can’t meet typical qualification requirements. These loans have higher rates and fees.

Couple stands in front of home purchased with subprime mortgage.

A subprime mortgage — also referred to as a “bad credit mortgage” or an “alternative mortgage” — is a financing option for home buyers who don’t meet the typical mortgage approval requirements set by traditional banks and credit unions.

Many Canadians consider subprime mortgages to be taboo, especially after the subprime mortgage crisis in the United States. But like many financial products, subprime mortgages have pros and cons to consider.

Pros and cons of subprime mortgages

Pros:

Allows certain individuals to buy a home without waiting until they qualify for a prime loan.
Easier to get approved.
May help you rebuild your credit.

Cons:

Higher mortgage interest rates.
Higher closing fees and associated costs.
May be limited to shorter terms than prime mortgages.

How subprime mortgages work

Some borrowers don’t meet the qualifications to be approved for a mortgage with one of Canada’s chartered banks (referred to as A lenders).

Mortgage applications may be rejected for many reasons. For example, the borrower’s credit score might not meet the minimum for a mortgage or their income might be difficult to verify (as it is for seasonal workers or individuals who are self-employed).

These loan applications are considered less than ideal, or subprime.

In this situation, the borrower has two choices. They can pause their home-buying endeavor and spend time building a ‘prime’ financial profile in order to qualify for the best rates at a later date. Or they can seek out an alternative lender (referred to as a B lender) that is willing to lend them money immediately.

Since borrowers who cannot qualify with A lenders are, at least statistically, deemed to be a higher risk, the subprime mortgages offered by B lenders often come with significantly higher interest rates and closing costs.

» MORE: How to choose a mortgage lender

Can you still get a subprime mortgage in Canada?

Yes. Just because an individual doesn’t necessarily have a good credit score, or a traditional job, doesn’t mean that they’re unable to handle a mortgage. B lenders, which have more flexibility than Canada’s chartered banks, can meet the needs of these borrowers.

Qualifying for a subprime mortgage

While subprime mortgages do offer more flexibility, there are still certain qualification requirements. Depending on the lender, this may include:

Personal identification and proof of residency, such as passport or SIN number.
Pay stubs or other valid proof of income and employment history.
Bank statements.
Tax returns, T4 slips or notices of assessment.
A minimum down payment, sometimes as high as 20%.

What was the subprime mortgage crisis?

In the early 2000s, 20% of the mortgages in the United States were subprime mortgages.

Many of these subprime mortgages were part of a financial product called ‘mortgage-backed securities.’ At the time, these securities offered investors high returns, higher than any government bonds. So mortgage-backed securities quickly gained popularity which, in turn, made it easier for subprime borrowers to get mortgages.

In addition to low inventory and rapidly rising home prices, excessive subprime lending helped create a precarious situation known as a housing bubble.

In 2006, the U.S. housing bubble collapsed. Home prices dropped dramatically and it became incredibly difficult for borrowers to refinance subprime loans with high or adjustable interest rates. People defaulted on their mortgages but their homes were no longer worth the value of the outstanding loans. In turn, this caused the mortgage-backed securities to lose most of their value.

This set of events was the start of a massive economic downturn in the U.S. that became the global financial crisis of 2007 and 2008.

About the Authors

Kurt Woock

Kurt Woock started writing for NerdWallet in 2021 and has covered mortgages, cryptocurrency, electric vehicles and small business software. Prior to joining NerdWallet, Kurt worked for the Colorado Public Employees'…

Hannah Logan

Hannah Logan is a freelance writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.

What Is a Subprime Mortgage?

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