- A Lenders: Traditional Lenders – chartered banks, credit unions, and virtual mortgage houses
- B Lenders: Alternative Lenders
- C Lenders: Private Lenders
Traditional lenders such as chartered banks, credit unions, and virtual mortgage houses are referred to as A Lenders or prime lenders. Banks are the largest providers of home mortgages which is not a surprise since consumers deal with their banks on a regular basis, and banks have the advantage of attracting their existing clients to their mortgage products. Banks also heavily advertise their mortgage products on television and radio, in print publications, and directly to consumers in their branches. A key benefit of getting a mortgage from a bank is the ability to combine and manage all financial products within your bank account, with an instant online overview of your chequing and savings accounts, investments, credit cards, loans, and mortgages. While banks are generally considered to be robust and safe, they are somewhat limited to offering their posted mortgage rates which may not be the best available rates compared to other lenders. Given the recent competitive landscape, many banks are now making a good effort to compete more aggressively for business.
Alternative lenders also referred to as B Lenders are more flexible than the big banks in how they scrutinize mortgage applications. While there are still key criteria to be met, they review each individual case and are willing to consider other documentation or factors that demonstrate your ability to handle the mortgage obligation. Alternative lenders are suitable for many types of borrowers from real estate investors to people who have slightly bruised credit; self-employed individuals who show lower income; or for divorcing couples with damaged credit. Rates from alternative lenders may be higher – given that the borrower’s situation may be considered more risky than average.
Who are private lenders? Any individual or group of individuals that have a large pool of savings can become a private lender. Private lenders offer quick, easy access to money as a short-term solution for many scenarios.
When is private lending an appropriate option?
- for individuals with bad credit history – difficulty meeting standards of traditional lenders
- If the banks have declined your renewal and you need to bridge the gap in order to rebuild your credit
- when you need bridge financing for a new purchase without having to break your existing mortgage
- for real estate investors who need funding for the mandatory 20% down payment
- to top-up a down payment when a buyer only has 15% and needs to come up with the additional 5%
- for construction financing when you need a progress-draw mortgage for the build period
- to pay out a spouse during a divorce
- to pay out high-interest credit card debt, improving overall credit
Private lending is similar to a 2nd or 3rd mortgage and commands higher interest rates than traditional or alternative mortgage rates. While the rates are higher, the payments are interest-only for a short-term – so payments will not reduce the principal amount borrowed.
In addition, private mortgages are not eligible for mortgage insurance, so if the borrower defaults on payments, the lender may want to sell off the property quickly. As a result, before accepting the mortgage, the lender will want to ensure that the property itself and the location are desirable and would sell fairly quickly – if it becomes necessary.