In Toronto’s white-hot and competitive real estate market, securing a mortgage via the traditional bank channel isn’t always an easy ask. For too many borrowers either through self-employment, non-traditional income, history of credit problems or simply a desire for greater flexibility the emergence of alternative mortgage lenders is providing a genuine way forward. But with that prospect comes risk and provisos. We should know what’s going on, why it’s significant in Toronto, and what you need to be aware of before proceeding.
Why are alternative lenders expanding in the Toronto market?
Canadian (and Ontario) traditional banks have stringent regulatory restrictions. They use typical income verifications, have credit-score cut offs, and impose federally required stress testing that ensures you can afford your mortgage Toronto at a higher rate than you will pay. When the market is short and Greater Toronto Area (GTA) house prices are high, a lot of buyers or even refinance applicants find they don’t “qualify” under these stringent standards. That’s when alternative lenders come into play.
Alternative lenders, an all-encompassing category that includes credit unions, B-lenders, monoline lenders, and private lenders provide mortgages to borrowers that the traditional lenders won’t, or will only on stringent terms. Based on recent industry reports, this category of lending within Ontario has experienced relatively high growth as demand increases for alternative financing products.
For instance:
If you are self-employed with variable income, or rental/foreign income, or if there are historical marks on your credit, alternative lenders will view your file differently.
If you require faster funding (e.g. because you need to close quickly in a competitive bid in Toronto), traditional banks may be slower or less flexible; other lenders can go faster.
In brief: During a competitive Toronto housing market, alternative lenders are stepping in providing more flexible eligibility.
What “alternative lender” actually signifies in the Toronto context
It is useful to define the terminology since “alternative” is broad. Some of the main categories:
- A-lenders: The big banks, nationally recognized, with typical criteria.
- B-lenders: Lenders less strict on credit history or documentation of income, but regulated to some extent and charging higher rates or demanding higher down payment/risk.
- Private lenders/monoline/equity lenders: They might lend more on the basis of property rather than income, might have a much higher interest or fee, and might be riskier.
In Toronto, when you’re working with an alternative lender, you may come across such jargon as “Interest-only mortgages”, “no income verification”, “higher loan-to-value based on equity”, etc. These can be good choices, but they also imply additional due diligence on your side.
What to look out for: Risks & key questions
Although alternative lenders can provide access, you need to be careful and ask the right questions. These are the principal risk areas:
- Higher interest rates and fees
Since alternative lenders assume greater risk (credit, non-standard income, type of property), their rates will be less competitive. As per several sources: “Higher mortgage rates. Alternative lenders offset the higher risk they assume by charging higher interest.”
Also, be careful of upfront charges, prepayment penalties, and other extra fees.
- Down payment / loan-to-value (LTV) requirements might vary
Although some alt lenders will be flexible, most demand greater equity or bigger down payments (particularly for higher-risk borrowers). For instance, a 20% minimum down on most B-lender transactions is standard.
- Fewer regulations or consumer protection
Mainstream banks are regulated federally and are subject to strict regulation. Alternative lenders can function under provincial regulation (or private equity deals) and therefore might not offer the same protection.
So you’ll want to see the small print: What if you default on a payment? What’s the default procedure? What are your rights?
- Exit strategy / refinance risk
Since you can begin with a higher-rate product or non-standard term, you need to think about how you’ll transition into a “normal” mortgage in the future or deal with renewal. A lot of borrowers use an alternative mortgage as a stepping stone to a more traditional product down the line – but that requires planning.
“Bear in mind that access to B lenders is subject to the brokerage … The ideal solution for you will be … an open exit strategy to transition from B lender to an A lender later on.” If you overlook the exit strategy, you may find yourself with high expenses or poor terms for the long term.
- Property type/condition risk
Sometimes alternative lenders will take properties or types of income that banks won’t – but at times that’s because of a higher risk (less marketability, more maintenance, non-traditional zoning). They might charge that risk in the loan.
- Transparency and servicing problems
Reddit users frequently mention problems such as: “the loan gets sold off”, “servicing changes”, “rate resets are less transparent”. Always investigate how the mortgage is going to be serviced and what you’ll be obligated to do.
How to do it safely in Toronto
If you’re looking at an alternative lender for a Toronto mortgage, here’s what to do:
- Do this through an experienced mortgage broker who is familiar with alternative lenders and can shop around from both the mainstream and alternative sides.
- Require full disclosure of interest rates, fees, prepayment fees, renewal terms and what you get if you don’t pay.
- Read the small print: particularly about what the lender demands of you throughout the term, and anything that triggers higher rates or default.
- Exit strategy: Have a plan for how you’ll transition into a more normal mortgage down the line, or your refinance strategy.
- Know your cost: With greater interest + fees, calculate it out: What is your effective rate, amortization, overall cost throughout the term, compared to going the bank route if you can.
- Make sure property and your circumstances are sustainable: Even if you can currently qualify with alternative terms, can you cope with changes in property condition, income, interest rate increases, etc., in the future?
- Verify the lender’s reputation: While many alternative lenders are reputable, you want a lender with a history, clean service and understandable documentation.
Use the mortgage stress test mentality no matter what: Even if the lender doesn’t require a federal stress test, make sure you can afford the payments if interest rates rise or your income drops.
Why is this important now in Toronto
Since Toronto’s real estate market is costly, competitive, and dynamic, most buyers and homeowners are in situations that place them beyond the “ideal bank borrower” category. Whether self-employment, investment properties, non-traditional income, or previous credit problems, alternative lenders offer solutions that previously weren’t as common.
But with the convenience of accessing such non-traditional routes, the danger of getting into an expensive or ill-formed mortgage is greater. In a place such as Toronto, where so many expenses (taxes, upkeep, condo fees, shifting interest rates) are high, the stakes in making the right choice are higher.
Conclusion
Alternative mortgage lenders in Toronto are a welcome trend for access, providing doors to buyers and owners who could otherwise be excluded from bank financing. “Alternative” is not synonymous with “easy at no cost”. They carry more risk, more cost, and are the result of careful scrutiny and planning.
If you’re thinking of one of these lenders in Toronto, come with your eyes wide open: Compare the deal, know the total cost, plan for your future, and ensure your property and financial status can handle the terms. With proper preparation, a different lender can be an effective tool but if you jump in without prudence, you might end up with long-term drawbacks.