Should you fear the “B Lender”?

October 2, 2012 | By | 22 Comments

Mainstream mortgage lenders are not for everyone

One of our alternative lenders was visiting the office last week and gave us an update on their products and policies. What struck me, not for the first time, was that we Canadians are so nervous about venturing away from the so-called “A Lenders” and big names that we’re familiar with. Their marketing dollars have made sure of it! However, we’re usually NOT “richer than we think”, and not everyone fits into the box that the mainstream lenders need to squeeze you into. You may have past credit issues such as late payments, collections, or bankruptcy. Or, you need to use self-declared income because you’re a small business owner or solopreneur. Perhaps you’re new to Canada. You simply may not fit into that mainstream box.

Alternative mortgage lenders consider whether it “makes sense”

The alternative mortgage lenders, also known as “B Lenders”, that we deal with are willing to look at each situation on a case-by-case basis. Yes, they have criteria you need to fulfill, but they are more able to look at the overall “story”. For example, if there was a bankruptcy or bad credit in your past, they want to understand why. If you’re running your own business and your tax return shows a low income due to all the writeoffs you’re taking advantage of, they will consider documentation that you have which might more accurately reflect your real income. This approach allows more leeway for you, the borrower, to show that you do qualify for a mortgage.

Mortgage rates with B lenders

What about the rates? Compared to the A Lenders, the B lender mortgage rates are higher, since your borrower profile is considered more risky than average – as of this writing, you’re looking at a range of about 3.99% – 5.99%. On top of this, there is usually a commitment fee or lender fee charged up front. I know this seems high compared to the low 3% rates we’ve been hearing about. However, to those of us who remember rates in days past in the range of 10-12%, even these B rates seem fantastic in comparison.

What’s not so favourable?

So what are the downsides of working with a B Lender? Obviously, the cost is one. You can also expect that they are going to ask for a larger down payment – 15% to 35% – depending on both your situation and the property you’re financing.

Finally, while they often offer great pre-payment privileges, they do charge more for paying out the mortgage early, so check those out to make sure you understand them fully. As well, the B Lenders are very strict about missed payments, so you need to be diligent about paying on time, or else you need to let them know exactly what’s happening so that they can work with you to resolve any issues.

A stepping stone taking you back to mainstream territory

When I’m talking to clients about potentially considering a B Lender, I encourage them to look at it as a “stepping stone” approach. Whatever the reason for going this route, the ultimate objective is always to get back to mainstream territory. As such, not only do we work on getting the mortgage financing now, but we also look at what needs to happen after the mortgage is in place, so that the options at renewal will eventually allow them to move to an A Lender.

Let me know what you think!  Would you consider a B lender?  Or is it Big 5 Bank all the way?

And, if you want to read my posts related to mortgages after bankruptcy, click here.

To read more about financing the purchase of a first home in Ontario, click here.

 

 

Photo credit: [c] Jamie Brelsford for stock.xchg

Filed in: Bankruptcy, Bruised Credit, Debt Consolidation, Purchase | Tags: , , , , , , , , ,

About the Author (Author Profile)

I'm a Toronto Mortgage Broker. My focus is on saving people time and money in financing and re-financing their homes. Am passionate about helping people make informed choices, giving back, and helping to improve financial literacy in Canada.

Comments (22)

  1. Philip Lee

    Very informative, thank you so much for the explanation on how B lenders work.

    • You’re very welcome! I think many of us don’t really know who the alternative lenders are and what to expect if you need to work with them, so my objective with this post was to provide some clarity. Glad you liked it!

  2. Ellie

    Thank you for the info! very helpful!
    I do have a question if I may: when you first get a mtg from a B lender is it for a year? Or they do offer 5-year fixed mtgs as well?

    • Hi Ellie, thanks for the great feedback! To answer your question: most typically people will choose a 1, 2, or 3 year term. The reason for this is that you usually would want a shorter term to fix whatever the other issues are (e.g. bruised credit, not enough re-established credit, and so on). Then you’d work on replacing the mortgage with an A lender, with hopefully a better rate and better terms & conditions, where you’d be more interested in locking in for a longer term. Any other questions, don’t hesitate to ask! Cheers,
      Ingrid

  3. Viji Shan

    Thank you Ingrid for your useful information. I wanted to ask you couple of questions.

    I want to refinance my house. I’m on consumer proposal right now and I will be paying it off by the end of this month. But, I know that it takes 3 years to clear off my records. At what rate can you get me a mortgage?

    My current mortgage balance is 304,000.00 and I want to refinance for 505 000.00. The value of the house is 690000.

    My sister is also on the title. After refinancing, she won’t be on the title. So how much tax do I have to pay to remove her name from the title?

    Thanks

    • Hi Viji, thanks for your questions! It’s really hard for me to answer specifically what rate you’d be looking at, because an alternative lender looks at the entire picture. How much re-established credit you have, what your income is, etc, are all important in calculating the rate. If you would like to discuss this more specifically, the best would be for us to speak directly – just send me an email using the “contact me” link.

      With regards to removing your sister off title, this would be a question for your lawyer, because there are a few ways they can do this to reduce your land transfer tax. It really depends on how things were originally set up, your mortgage amount, and some other factors that a good real estate lawyer will factor in.

      All the best with this!

  4. Judd hoan

    What is commitment fees..! a B lender just charge me $3750 saying commitment fees and I gave them $97000 deposit on a home with 4.3% interest . And also the brooker chafmrge me a broker fee of $1500 .I sold my Home thinking i will have egnough money to open a business for my 2 children , now my girls are upset. All my dreams desepear.please your advise will appreciate thanks alot

    • Hi Judd, the commitment fee (sometimes called a lender fee) is an up-front fee that alternative lenders typically charge. It’s calculated based on the size of your mortgage and the rate you’re getting. I’m sorry your broker didn’t explain this to you up front so you could make an informed decision. Your broker might be able to work with the lender to negotiate the fee (sometimes the lender will reduce the fee in exchange for a slightly higher rate), or you might be able to have it included in the mortgage amount rather than paying it out of your pocket. You will need to discuss that with your broker to see what options they can offer. Best of luck, I hope it all works out for you!

  5. Shelby

    What should I expect going through a B-lender for a personal loan?
    Any posdible hidden costs or fees that normally accompany loans?
    Any info would be great, thanks.

    • Hi Shelby, thanks for the question… I don’t deal with loans, just mortgages (and home equity lines of credit, secured by your home), so I wouldn’t be able to give you much specific guidance on loans. You most definitely need to read the fine print though as I have seen clients of mine come in with loans that have crazy high interest rates and fees, because of their past credit history. So you need to make sure you understand every single charge that will be applied before you sign up for anything. If you’re trying to re-establish credit, a better bet would be secured credit cards, so you don’t have to carry a high balance and pay a ton of interest, for money you don’t need. Best of luck!
      Cheers,
      Ingrid

  6. Sandra

    Is Merix Financial a B lender? Is anyone who is not one of the 5 major banks considered a B lender? Great article, I found it very helpful. Thanks!

    • Great question Sandra – thanks for asking! Merix is actually an A lender. In fact, there is a ton of A lenders in Canada, some of which are the big banks, and some of which are non-bank lenders, who don’t have a branch network, but who are still looking for the “AAA” types of clients. These are companies like Tangerine Bank (formerly ING Canada). Mortgage brokers don’t work with Tangerine, they have their own sales channel, but we do work with a ton of other non-bank A lenders (see my article about “monoline mortgage lenders” here). And we have a number of very good B lenders we work with also, who are more flexible in their terms and conditions, for people who can’t fit into A lender criteria. I hope that helps! Cheers,
      Ingrid

      • Mursal

        Hello! Great article! Just a question the B lender commitment fee is usually around how much? My broker is saying its 2.5% of price of the voice.

        • Hi Mursal, thanks for the question. If the B lender charges a fee, it is typically 1% of the mortgage amount. However, if you have a specialty product that “bundles” both a B lender mortgage and a private mortgage, such as if you are doing a 10% down payment and you need a B lender mortgage that’s 90% of your home’s purchase price, then the commitment fee may be higher. This is because with the bundle, there are two lenders involved, not just one. Without knowing the exact details of your personal situation, I can’t comment further than that, but I would urge you to talk to your mortgage broker so that they can explain the reason for the fee in more detail.

          All the best,
          Ingrid

  7. ALI

    If we go with B lenders initially, and later on our financial situation changes or we are making good money. Can we go back to A lenders or we are stuck with them forever …

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