In October, the Office of the Superintendent of Financial Institutions, the country’s banking regulator, introduced a new stress test for banks to apply to borrowers. Those taking out uninsured mortgages have to be qualified at whichever rate is higher: the rate offered by the bank plus two per cent, or the five-year benchmark rate published by the Bank of Canada. The rules follow similar changes last year that apply to borrowers of insured mortgages. Why should you care and what does it mean for subprime market and private lending read below.
Typically, borrowers who can’t qualify for a mortgage at a traditional bank will try to get one from an alternative lending bank. These companies specialize in lending to self-employed and new Canadians who might not have the income or credit history required by banks. Large alt-lenders are regulated by OSFI and have to implement the new stress tests, too.
Borrowers may then have no choice but to go to a private lender to secure a mortgage. The mortgages provided are short-term, interest-only loans at high rates. Typically, a borrower might take a private loan for a short period of time to build better credit, and later move to an alt lender or traditional lender to secure a lower rate.
However, there still can be hurdles for the borrower. The private lending industry has already grown so much in recent years, private lenders are not exactly flush with cash to lend out. Private lenders are not banks, and can’t simply take deposits. Their limited amount of funds would be an additional stress to the market.
There are many differences between conventional residential mortgages and sub-prime (private) mortgages. Having a specialized broker in the field can save you thousands in fees, rates and penalties.
For more information contact your Vancouver Private Mortgage specialist today!