Difference between a normal mortgage vs. a private mortgage
As of Jan. 1, 2018, the federal government requires banks to stress test prospective home buyers. While this is another hurdle to home ownership, it helps keep the economy stable. A stress test requires you to prove that you have enough money to pay your mortgage even when interest rates potentially increase in the future.
When banks in the US qualified people for mortgages who could not afford it, a housing bubble followed triggering the financial crisis of 2008. The crisis led to the devaluing of homes, widespread job losses, and taxpayer-funded bank bailouts.
Major Canadian banks now require first-time homebuyers to put at least a 5% downpayment on a home’s price and 10% on any amount above $500,000. On top of that, you must earn more money than people who qualified in previous years.
It is no wonder people are finding it difficult to qualify for a mortgage through traditional lenders. If you are tired of renting but find the new rules too demanding for your financial situation, there are other options. You could turn to alternative lenders to secure a home loan. Here is a breakdown of the different lenders you can choose from:
Banks and credit unions fall under this category. They cater to customers with reliable income and good credit, who are considered A clients. Most people who obtain a mortgage do it through these lenders.
Federal regulations govern major banks in Canada like CIBC, TD, RBC, BMO, Scotiabank, and National Bank of Canada. That means you will be stress tested if you try to apply for a mortgage through these institutions. A stress test determines whether you can afford to pay interest at the five-year average posted rate, or two percentage points higher than the rate their broker or bank offers – whichever is more.
Credit unions primarily cater to A clients as well but are not subject to federal regulation. Instead, they are regulated by provincial governments. They do not have to adhere to the stress test guidelines, but many are adopting them anyway to protect their customers and their own interests.
Other banks and institutions in Canada offer mortgages for B clients. These establishments decrease the bar to qualify for their products but offset the risk with higher interest rates. They cater to people who lack a strong credit history or guaranteed income like self-employed individuals or recent immigrants. It is essential to understand a contract offered to you by a B lender well, so you do not get trapped with unaffordable interest rates.
Private or unregulated lenders
This category can include a broad spectrum of people such as individual lenders like your parents, or businesses that specialize in mortgages but are not regulated by the same rules as credit unions and banks. These lenders are likely able to offer you a contract you qualify for, but sometimes at the expense of high fees.
Whoever you ultimately sign a contract with, it is crucial to read it carefully and have a thorough understanding of what terms you agree to. Here are the main questions you should ask while looking over a mortgage agreement:
What does the fine print say?
What will be my monthly mortgage payment?
What is the penalty for prepayments or larger payments?
What is the penalty for missing a payment?
How high is the interest rate?
What will it cost to get out of the contract?
Do not sign anything until you are satisfied with the answers to all of these questions.