Ever since the introduction of the stricter mortgage stress test, many Canadians have struggled to get traditional financing when buying a home or getting a second mortgage. As a result, more and more are turning to private mortgage lenders, which nearly always come at a much higher interest rate.
Private mortgage lenders in Canada can be anything from a large corporation with hundreds of employees to a single investor, but most operate in the same way. They don’t have as stringent requirements for a mortgage as banks do because they don’t have to give the stress test. Unlike banks, private mortgage lenders aren’t federally regulated.
That doesn’t mean private mortgage lenders in Canada are all loan sharks. They’re just able to get around this particular law because they don’t take deposits (the reason that banks are so closely regulated). They lend with entirely their own, or their investors’, funds.
But while they’re not loan sharks, private mortgage interest lenders rates are substantially higher than bank rates. The best 5-year fixed rate for a new purchase right now is 2.64%, while private lender rates start at 7% and can go up as high as 15% for a 2nd mortgage.
The problem with private mortgage lenders isn’t that they have higher interest rates than banks, it’s that so many homebuyers and homeowners are turning to them to get a mortgage in the first place. Since so many Canadians don’t qualify for a traditional mortgage under the new stress test rules, private mortgage lenders are their only option. It’s bad for borrowers, who now have to pay more in interest charges for what’s essentially the same mortgage.
This change also affects those already with mortgages to a lesser extent. Under the new rules, you have to requalify for a mortgage at every renewal as well as when you first purchase a home, unless you’re renewing with the same lender. This puts a lot of power in the hand of your current mortgage holder, since it’s a lot harder for you to shop around and find the best rate when there’s no guarantee you can pass the stress test.
It also makes it harder to do something as simple as refinance your mortgage, even with lots of equity. On average, the stress test reduces your affordability by 20%, even for those who already own their home.
Private lenders get around these regulations, so approval is easier, but you end up paying for that ease of access. Private mortgages are best taken for short-term goals, such as covering a temporary cash shortfall or stopping power of sale, before switching to a bank or monoline lender after the situation is resolved.
While Toronto isn’t different from the rest of Canada when it comes to the law, it is fairly unique in the Canadian real estate market because of its high housing prices. More people are turning to private lenders in the Toronto and Vancouver area than anywhere else, even among first time homebuyers, because of the difficulty of overcoming the stress test when prices are so high.
The good news is that private mortgage lenders in Toronto are much more lenient than in other areas because of the desirability of properties. Private lenders know that even if the borrower is unable to make their payments, they will probably be able to get all their money back by selling the property quickly.
Because of the highly desirable market, private mortgage lenders rates in Toronto can often be lower than a similar private mortgage in other markets. Interest rates go up when the risk of losing money is higher, so the hotter the market, the better for borrowers.
Getting a consumer proposal can feel like a huge weight off your shoulders if you had been struggling with debt for a while. It allows you to settle your debts for less than the full amount and move on with your life. Unfortunately, it can take some time before your credit score is good enough to get a mortgage – or does it?
If you’ve been having trouble getting approved for a mortgage because of a consumer proposal on your report, you may still be able to get a mortgage. The time you have to wait before applying for a mortgage after a consumer proposal depends on when you finished paying off your proposal and how diligent you were in rebuilding your credit.
It takes 3 years from the date of discharge for a consumer proposal to fall off your report. This is different from the date you enter a proposal – you are only discharged once you finish your payments. The average length of a consumer proposal is 3 – 5 years, which means you’ll be discharged 6 – 8 years after beginning a proposal.
Your first priority when in a consumer proposal should be making all your payments on time. But once you’re done paying and have no more debts, what should you do next? The proposal will have hurt your credit score, so you’ll want to bring it back up to get access to the best mortgage rates in Canada.
You probably have many monthly payments all due on different dates. It can be easy for one of those payments – especially if it’s one of many credit cards – to be missed, adding a huge black mark back onto your report.
Missing payments is one of the worst things you can do for your score. Luckily, we live in the age of technology which can make it so you never piss a payment again. Many banks will allow you to schedule regular bill payments, either on a specific date every month or a time frame like every two weeks. The more bills you have set to autopay, the less you have to worry about making all your payments on time – your bank will do it for you.
When setting up your autopay, remember to keep enough money in your chequing account to cover all those bills. If you don’t, you’ll run into one of two problems:
Autopay can be very convenient, but if you never check your balances you can still miss a payment.
If you have any outstanding debts after your consumer proposal, you should start paying those down as well. The sooner you get out of debt, the more money you’ll save. You’ll spend less in interest and increase your monthly cash flow.
In order to get approved for credit after a proposal, you have to show lenders that you learned your lesson. The only way to do this is to use a credit product, like a credit card or loan, responsibly.
If your score is particularly low, you’ll have few options for getting credit products to rebuild your credit in the first place. The best bet if your score is too low to get normal credit cards is to get a secured credit card. Be sure that it’s a secured credit card and not a pre-paid credit card – although they may seem similar at first, a pre-paid credit card will not improve your score.
A secured credit card requires a down payment to apply, but approvals are almost always guaranteed. Your credit limit is usually equal to the amount of money you put down, and you use it like a normal credit card. Your deposit will not be used to pay the balance unless you become severely delinquent on your payments. Instead, you pay it off like a normal card – complete with interest payments if you carry a balance. With a few months to a year of regular, on-time payments, your score may improve enough for you to graduate to an unsecured credit card. When you cancel a secured card, you get your deposit back.
Aside from improving your credit score, building a big down payment is the best thing you can do to save money on your mortgage. How big your down payment should be depends on how soon after a proposal you plan on buying a home.
Your credit score will be low after being discharged from a consumer proposal. As a result, AAA lenders like banks probably won’t approve your mortgage applications. Your best option would be to go to an alternative or B lender. They are willing to take on more risk by lending to those with lower scores, but they charge higher interest rates. Additionally, they’ll want to see you bring a higher down payment – think 15% and up.
The longer you wait after a proposal discharge, the more likely it is you’ll get a better rate. You’ll have more time to rebuild your credit so your score will be higher, and any previous missed or late payments may have fallen off your report. You can bring a smaller down payment to a AAA lender (starting at 5%) but you’ll save more money on your mortgage if your down payment is higher.