Understanding B Lender Mortgages

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.

The costs and conditions involved with a B lender mortgage can make it an expensive option. Understanding how one works is a must before you apply.

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.

Federally regulated 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.

How B lenders differ from A 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

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 for borrowers such as new arrivals to Canada and investors.

B lender mortgages typically come with term limits that max out at three years.

Fees and mortgage rates

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.

Is a B lender mortgage right for you?

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:

How to get approved for a B lender mortgage

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.

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:

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.