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The Rise of Non-Bank Mortgage Lending

The Rise of Non-Bank Mortgage Lending

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What is Driving the Growth?

Non-bank mortgage lending is trending upwards, and the rise can be attributed to several different factors, including:

  • Alternative lenders can take on high-risk loans like those for people with poor credit scores. Private lending companies and individuals can take on customers that traditional banks avoid. 
  • Other factors contributing to the rise in non-bank lending include Canada’s high-interest rate environment.  This is even though the Bank of Canada held the key interest rate at 5% as recently as April 10th, 2024. This means that as of March 2022, 1/3rd of borrowers have seen their monthly mortgage payment increase, according to the CMHC. Homeowners facing the financial distress of a foreclosure or power of sale can stop either one with a non-bank loan. 
  • Non-bank lenders have a streamlined approach to applications. For example, a private lender will place more emphasis on the equity that you’ve built up on a property over other financial information in your credit score. Most private lenders will require that you have over 25% equity built up.

Why Are Borrowers Attracted to Non-Bank Lenders?

Borrowers with poor credit scores can be attracted to non-bank lenders for private loans. According to Equifax, people with credit scores below 660 are less qualified for good long-term loans. 

The private lenders who supply non-bank loans consider various income sources, including self-employed income. They have a streamlined process that can include existing investments, child support income, and child tax credits for people looking to qualify. These non-traditional lenders offer more flexible qualification criteria. 

Contractors and other borrowers building homes and structures find non-bank lenders appealing to circumvent money restrictions. For example, a construction loan requires that the lender follow a series of guidelines and milestones to take draws. There are none of these types of restrictions with a private non-bank loan. 

What Mortgage Products Do These Lenders Offer?

Non-bank lenders indeed offer a range of products, including private mortgages, extending loans to borrowers considered risky by traditional standards.

  • These lenders can provide first mortgages at rates typically higher than those of more traditional banks because they take on a larger risk. 
  • Many of them, like private lenders, offer second mortgages on existing properties. One of the significant metrics they use is the loan-to-value ratio (LTV). This essentially compares the value of any mortgage loan with the corresponding value of the property used as collateral.
  • Non-bank lenders do offer bridge loans in specific circumstances, providing financing for up to 6 months.

Those are just a few of the types offered. Because many people are in financial difficulty when they turn to non-bank lenders, consolidation loans to pay off high-interest credit cards are also popular.

How Do Non-Bank Lenders Compare with Traditional Banks?

The differences between these two lenders can be significant when businesses or individuals are looking to apply for a loan.

Traditional Banks and Credit Unions 

Traditional banks usually offer lower interest rates but have stricter acceptance standards. Several steps are involved, starting with the pre-approval that gives borrowers an idea of how much they can afford. 

Conventional mortgages also require several categories of documents that begin with government-issued IDs. Lenders will also require the T1 general tax form and some recent pay stubs to verify your income.

Self-employed people need documentation spanning as far back as three years. Those are just some of the required documents for a conventional mortgage.

  • It’s also important to remember that most traditional or A lenders are subject to federal regulations and stress tests.
  •  A stable employment history, income, and average credit score above 660 are essential.

Non-Bank Lenders 

Non-bank lenders also include private lenders, and there’s a faster approval process and a more direct path to funding. Quite often, the people who get these alternative mortgages have an employment history that doesn’t fit a more traditional mould.  

  • These lenders also place more emphasis on equity and less on credit scores. For example, a private lender will generally consider an application with greater than 25 percent equity built up. 
  • Non-bank lenders indeed possess greater flexibility regarding approval criteria, actively considering non-traditional income sources like self-employed profits.

Are You Looking for a Non-Bank Mortgage?

The market share of non-bank mortgages by private lenders in the first quarter of 2023 jumped to 8% from 5.3% in 2021, while the share of those lent by big banks fell to 53.8% from 62%. So, this shift started a few years ago.   

Non-bank lenders are increasing their share of the mortgage sector. Several solutions are available, and the shift is at least partially responsible for the stricter standards traditional banks implement due to higher interest rates.

Mortgage Broker Store focuses on numerous mortgage-related products. One of our priorities is mortgages that don’t meet traditional lending institution requirements. Our team includes private lenders, brokers, and authorized mortgage agents. Let us help you prepare for and get a product that meets your requirements. Email ron@mortgagebrokerstore.com or call 416-499-2122.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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