If the banks say no, what is your Plan B? (and yes, there is also a Plan C)

For most Canadians the end game to qualifying for a mortgage is landing with one of Canada’s Prime lenders (also known as the Big 5 or 6). And along with that comes the satisfaction of defeating/fulfilling the sometimes (or more like, everytime) extraneous qualification guidelines and eligibility criteria. But at the end of the day, it’s totally worth it as you can boast about the great interest rate you were awarded and the exclusive membership to Canada’s growing homeowner club.

But what if the pathway to the Prime lenders is not successful for you, what then?

Well, if all else fails, there is always a Plan B (and there is a Plan C too). But let’s talk about Plan B first…

I like to refer to Plan B as “BandAid” mortgages. They are typically 1 year terms (and also available as high as 3 year terms). They are fully renewable and feature most, if not all of the typical features and terms you would expect to see in a Prime mortgage. Everything except one thing, and that being the fully discounted mortgage interest rate. The interest rate could be anywhere from 0.50% to 3% higher than the rate offered from a Prime lender. But, the blow (from the higher interest rate) is loosened considerably when you factor in an effective countermeasure that helps reduce your monthly payments bringing them closer in line to payments you would realize with a Prime lender. For example, one could end up with a higher interest rate, but when you factor in the extended amortization period associated with a BandAid mortgage, the monthly payment reduces down to a value that is more easily manageable now that the monthly payments are stretched from a 25 year period to as high as a 30 year span.

Here are the key takeaways from BandAid mortgages:

qualification criteria is loosened, considerably (less restrictive, intrusive documentation requests):
standard debt servicing ratios are expanded enabling an applicants purchasing power to significantly increase by as high as 10-15% in some cases
greater tolerance towards past credit blemishes and derogatory credit ratings (i.e. former bankruptcies, collections, consumer proposals, extraneous debts, etc)…Prime lenders would shut the door on these files, but not in the sub-prime space…they have a comfort level for these application profiles
longer terms are available, but 1 year terms are encouraged so as the give the applicant an opportunity to refinance with a Prime lender as soon as possible
probably the biggest takeaway is the possibility of entering the market sooner, than later, especially in strong & expanding markets where price reductions are not likely to occur in the foreseeable future (i.e. Vancouver, Toronto)

And lastly, what if Plan B doesn’t work?

If all else fails, there is a Plan C…Private Financing:

interest rates bump up further, but once again, a countermeasure is introduced that produces a more manageable monthly payment. Amortizations are available as high as 35 years, or the option to pay interest only payments is also available
some private lenders will also allow you to tack on an entire years worth of payment on the mortgage principle, thereby, bypassing any commitment to make monthly payments for an entire year
personally, I would avoid this pathway at all costs, but it does serve a purpose for many homeowners and potential homebuyers as it can strategically be used as a bridge for a limited period of time where a clear exit strategy has been planned to transition to a more desirable financing outcome

To end, here is a comparison of the three mortgage pathways based on a $500,000 mortgage principal:

PLAN A: Prime Lenders = $1,945/month to $2,120/month

PLAN B: Sub-Prime Lenders = $2,075/month to $2,600/month (that’s a $130 to $480 bump up)

PLAN C: Private Lenders = $2,500/month to $2,975/month (that’s another $300 to $475 increase on the monthly payment)

So…depending on where you fall within the pricing band, your Plan B could be as low as $100-$200 more per month to as high as $1,000/month (when compared to today’s fully discounted prime interest rates).