What Is an Alternative Mortgage Lender?

An alternative mortgage lender is a home loan provider that isn’t regulated to the same extent Canada's major banks are. That allows their lending criteria to be less strict.

For borrowers, this means that if you can’t get a mortgage through a bank, there are other options you can pursue.  

Examples of alternative lenders in Canada

There isn’t a single example of what qualifies as an “alternative lender,” so people may use the term to mean different things.

Generally speaking, alternative lenders are not federally-regulated financial institutions, so they have freedom to create their own lending criteria. The important point to remember is that “alternative lenders” captures a wide range of lender types, including:

An alternative to what?

The common thread among the lenders above isn’t what they have in common but what each is not: a big bank. Canada’s big six banks are behind three out of four mortgages.

Banks are also heavily regulated by the Canadian government. That isn’t to say alternative lenders don’t have any regulations: Credit unions, unlike banks, are usually regulated by provinces, which might have less stringent regulations than those governed at the federal level. But alternative lenders often have more flexibility with their eligibility requirements.

For instance, banks and other financial institutions regulated by the Office of the Superintendent of Financial Institutions must ensure applicants receive a mortgage stress test. Lenders outside that regulatory umbrella aren’t bound by this same requirement.

Also, if you’re borrowing from a bank, your credit score must meet government-mandated minimums. Some alternative lenders aren’t subject to those minimums.

Who can benefit from using an alternative lender?

Low credit scores or limited credit history are common reasons you might turn to alternative lenders. But those aren’t the only situations where alternative lenders can help.

You might also turn to an alternative lender if:

Downsides to using alternative mortgage lenders

Higher costs are the most obvious downside of alternative lending.

Because of who they lend to, alternative lenders tolerate higher levels of risk. They mitigate this risk by charging higher interest rates. Borrowing from an alternative lender often requires making a down payment of at least 20%, too.

There are other possible downsides to consider. The Financial Services Regulatory Authority of Ontario says borrowers should be fully aware of fees and penalties before committing to a mortgage from an alternative lender, which might be more severe than those found in bank mortgages. It suggests asking questions like:

These questions don’t imply that alternative lenders behave unethically. Instead, the absence of federally-enforced monitoring means you may need to be your own advocate.

How to find an alternative lender in Canada

The most effective way to find an alternative lender is to work with a mortgage broker. Many alternative lenders work exclusively with mortgage brokers, so even if you search one of these lenders out, you may not be able to apply without the assistance of a broker.

If a broker suggests an alternative lender you're not familiar with, find out as much as you can about them before moving forward with your application. Read online reviews and ask your broker about the lender's repayment terms, prepayment privileges, fees and reputation.

Other questions to ask include:

Alternative lenders might be the best choice for other reasons, even if you have great credit. Whatever your situation looks like, thinking through your long-term mortgage needs and options should help guide your decision.