A subprime mortgage also called a subprime loan, is designed for borrowers that do not have a high credit score. Subprime mortgages have become more common due to an increase in the number of people that have credit issues. Canadian government initiatives to reduce mortgage debt have also forced many homeowners to seek subprime mortgages. Ontario is now the largest market in Canada for subprime loans.
To qualify for subprime lending the borrower must have sufficient equity in their property. Most subprime lenders will not exceed a loan to value ratio of 75%. Subprime lending is not based on your credit score, therefore even if you have a credit score below 600, which is considered bad credit you can still qualify for a loan.
There are a few subprime financing options available for subprime borrowers. One financing option is the traditional amortized mortgage. A tradition amortized mortgage is common with large bank lenders and involves the borrower paying off both principal and interest with each payment. With private mortgage lenders, it is more common to see an interest-only mortgage. This means that the principal amount owed never changes and all payments go directly to interest fees. Many lenders that provide interest-only mortgages expect to recover their money by having the borrower refinance to a better mortgage or when the house is sold. Many interest-only lenders will also accept lump-sum cash payments to reduce the principal owed.
A subprime interest-only loan makes financing much easier with lower monthly payments. This is a good option for people who expect their income to increase in the future. A lump sum option is good for people who might be receiving an inheritance or insurance payment in the future.
Since a person applying for a subprime mortgage usually has a low credit score the interest rate for a subprime mortgage will be higher than the bank rate. In Canada, you can expect subprime rates between 6.99% and 11.99% when you apply for the loan. To get the best rate possible a borrower will need to have a low loan to value along with a credit score that can be improved.
Many people want to know why there are so many requests for subprime home loans. In Canada, the federal government imposed a set of banking rules called the “B-20” mortgage rules. The B-20 rules essentially mean that federally regulated banks can only provide mortgages to people who qualify under the new rules. The B-20 rules cover income levels, credit scores and equity levels in a property. If the borrower does not meet all three conditions the lending bank may reject the borrower.
In Ontario, the term “Subprime Lender” is used interchangeably with “Private Lender”. Most subprime lending companies are not required to follow the B-20 guidelines which restrict lending by federally regulated financial lenders. This means that subprime lending companies can set their own lending criteria. Most subprime lending companies do not have a minimum credit score or a minimum income requirement, but they do have a minimum equity requirement for mortgages.
The best way to find a subprime mortgage lender is to arrange it with a mortgage broker. Our brokers specialize in subprime mortgages and have many lenders across Canada, especially in Ontario. Our brokers work to get borrowers the lowest interest rate for their mortgage. We also advise borrowers on options such as annual and lump sum payments.
The mortgage market is bigger than most Canadians realize. TransUnion, one of the largest credit reporting companies in Canada, estimates that 11.90% of borrowers can be classed as subprime.
The Bank of Canada data shows that subprime lending companies are growing in Ontario. Mortgage originations for private lenders increased by 2.95% in 2018. The market share of private lending companies also increased from 5.71% in 2017 to 7.87% in 2018.
There are two major credit reporting companies in Canada, one is TransUnion the other is Equifax. Both collect data on Canadian spending habits and the amount of debt held by each Canadian consumer.
These two companies assign a credit score to each individual and people with a low credit score are considered to be subprime. TransUnion and Equifax lower your credit score every time you apply for any type of credit. They also lower your credit score when you miss payments or stop paying altogether.
Improving your credit score takes time, usually a year or two. Get rid of any credit cards that you do not use. Pay off the balance on the credit cards you do use, over time your credit score will improve.