Bad Credit and Alternative Mortgages
The short version
Alternative lenders, usually called B lenders, sit between the banks and private lending. They are regulated financial institutions, many of them substantial, and they exist for borrowers whose files do not fit a prime lender template. That might be bruised credit, a consumer proposal, self-employment, income that is hard to document, or a property a bank will not take. They assess the whole picture rather than a score, and they lean heavily on equity, so expect to need at least twenty percent. Pricing is higher than a bank and there is usually a lender fee. Terms are short, typically one to three years, because the arrangement is meant to buy you time to return to the prime market rather than to last forever. Approvals are on approved credit.
Who these lenders actually are
There is a persistent idea that anything outside a big bank is somehow disreputable. It is not. B lenders include trust companies, credit unions and mortgage finance companies, several of them federally regulated and publicly traded. They fund a substantial share of Canadian mortgages every year.
What separates them from a bank is appetite rather than legitimacy. A bank applies a fixed template and declines anything outside it, because that is what its funding model and regulator require. A B lender prices for risk instead, which means it can say yes where a bank cannot, and charges accordingly.
How they look at your file
Three things, roughly in this order.
- Equity. How much of the property you own outright is the foundation of the decision. It is what protects the lender, and it is why alternative mortgages generally cap out around eighty percent of value and often lower depending on the property.
- The story. Underwriters read explanations, and a clear one carries real weight. A missed stretch of payments during a separation, an illness or a business failure is a story they have seen before. An unexplained gap is what causes trouble.
- Whether the payment is sustainable. They still need to believe you can make it. Debt service ratios are more flexible than at a bank, not absent.
Location matters more than people expect. A property in Toronto, Mississauga, Brampton or Vaughan has a deep pool of willing lenders. The same property in a small town has fewer, and pricing reflects that.
The situations these lenders handle
- Credit damaged by a specific event: a separation, a job loss, an illness, a business that failed
- A discharged consumer proposal or bankruptcy, with some credit re-established since
- Self-employed income that filed returns understate, covered in more depth on our self-employed page
- Commission, contract or gig income that a bank will not average the way you would
- Property tax or income tax arrears that need clearing
- A previous mortgage in arrears, or a lender that has declined to renew
- Properties banks avoid: former grow operations, rural acreage, mixed use buildings, homes mid renovation
What it costs, honestly
More than a bank. The rate is higher, and there is usually a lender fee, commonly around one percent of the mortgage amount, sometimes with a brokerage fee alongside it. Add an appraisal and your legal costs.
We do not publish rate figures anywhere on this site, and alternative pricing in particular cannot be quoted in the abstract. It moves with the equity position, the property, the location and the strength of the file. What we will do is set out the complete cost in writing before you commit to anything.
The useful comparison is not against a bank rate you cannot currently access. It is against what happens if you do nothing: continuing to carry credit card interest, letting arrears grow, or losing the property. Measured that way, a B-lender mortgage is frequently the cheapest option available.
Getting back to a prime lender
This is the part to plan at the beginning rather than at the end. An alternative mortgage should be a bridge, and a bridge needs a far side.
Realistic exits look like this. Credit recovers over a two year term and a bank will take the file at renewal. Two years of stronger filed income finally support a prime application. Consolidated debt gets paid down, which improves the ratios. A renovation completes and the higher value supports a normal mortgage. The property sells.
We set out which of those applies to you before arranging anything, and what has to be true at renewal for it to work. If none of them is plausible, that is important information and we will say so rather than place the deal.
What to do during the term
- Pay everything on time, without exception. Payment history is the largest single factor in your score.
- Keep revolving balances well below the limit. Utilization matters more than most people realize.
- Do not close your oldest credit card. Length of history helps you.
- Avoid new applications. Each one leaves a mark and lenders notice clusters.
- Check your report for errors, which are more common than you would hope, and dispute them.
Two years of that changes a file substantially. Come back to us six months before the term ends rather than at maturity, and there will be time to place you properly.
Common questions
What credit score do I need?
Alternative lenders do not work from a single cut-off the way banks do. They look at what happened, when it happened and what has changed since. A score in the low 500s with a clear explanation and real equity is often workable. A high score with an unexplained recent default can be harder.
How much down payment or equity do I need?
Usually at least twenty percent, since alternative mortgages cannot be insured. Some lenders want more depending on the property and its location. Equity is what makes these deals work, so the more there is, the more flexible the lender can be about everything else.
Will I be stuck with this forever?
No, and you should not plan to be. B-lender terms are typically one to three years, and the point of them is to give you time to fix whatever pushed you out of the prime market. Most borrowers we place this way are back with a bank at the end of it.
What does it cost?
More than a bank, and there is usually a lender fee on top of the rate, often around one percent of the mortgage. We put the full cost in writing before you commit. Whether it is worth paying depends on what the alternative is, which is a calculation rather than a judgment.
Does a consumer proposal or bankruptcy rule me out?
Not at all. Lenders want to see it discharged and some re-established credit afterwards, and the further you are from the discharge date the better the pricing. People buy homes after a proposal every year.
Can I still be declined?
Yes. The most common reasons are not enough equity, a property the lender will not take as security, or no realistic plan for how the mortgage gets paid or refinanced later. Credit alone is rarely the reason on its own.