For those not familiar with mortgage lenders, alternative lending agencies – including B-lenders – have previously been thought of as the car salesmen of the lending world. They were the last resort; the place you went only when there was nowhere else to go. Today, however, they might also be the only lender willing to do business with you.
Recent changes to Canada’s mortgage regulations, coupled with the fury of Vancouver’s real estate market, has made B-lenders highly sought after, and, quite frankly, for some the only option. But are B-lenders the last hope for many BC home buyers?
The reality of today’s market is that those with damaged credit are far from the only borrowers seeking out B-lenders. New business owners unable to show two years of reported income are a great example of a new demographic who are actively seeking out alternative mortgage lenders. While the larger federal institutions shy away from borrowers like this, a B-lender may agree to look at alternative documents, including bank statements, to come up with a reasonable income. Fees will vary, but in my experience, it’s usually one to two per cent (or slightly higher based on the mortgage amount being borrowed).
And the truth of the matter is this. If you are not reporting your income or you are unable to do so, obtaining a mortgage has become more challenging, and a B-lender might be your best and only option.
A B-Lender Case Study
To use a recent example, my client – a new business owner with excellent credit and good revenue – couldn’t show enough of an income history to appease the larger lenders. Because more traditional lenders were not interested in doing business with him, we went with a B-lender who was.
We negotiated a mortgage with a two-year term, and his payment was a little over 10 per cent higher than it would have been with a traditional lender. In the end, his payments rounded out to approximately $500 more per month; or an annual increase of $6,000. The one-time fee of one per cent translated into $10,000, and while he is paying above what he would have with a traditional lender, he bought the home he wanted when he wanted, using the income he was reporting.
When we worked out the numbers, even though his rate was higher, which lead to increased payments and the fees involved, he was still better off ahead. If you are wondering why, think of the top-tier income tax he would have had to pay for two consecutive years on the required income amount to take out the same loan with a traditional lender.
B-Lenders are Not Forever
When entering any mortgage, it’s important to remember that nothing is forever. This can have both negative and positive outcomes when it comes time to renegotiate. Terms for B-lenders typically run their course from anywhere between one and three years. Once you are up for renewal, it is your prerogative, and that of your mortgage broker, to search out the best mortgage products including rates that suit your situation.
As a new business owner, consider the income you are reporting, and if you can provide at least two years of average income, then you can move to a traditional lender with lower rates. However, there are downsides to this as well, seeing that the tens of thousands you will pay in income tax is far greater than a one-time fee and a slightly higher mortgage rate.
A Changing Mortgage Market
Our world is changing drastically and the economic landscape of today reflects this reality. Today a large percentage of Canadians are self-employed. While B-lenders usually have fees and do charge higher interest rates than A-lenders, borrowers do not need to pay insurance premiums – even on some ratios that would be insured otherwise. It is important to note that almost always a larger down payment is also required. Not nearly as focused on reported income levels, the primary interest of a b-lender lies heavily in the property itself.
Taking risks on properties that most big lenders shy away from, in my experience the aperture of a B-lender is broader. They operate without the stringent guidelines imposed on borrowers by the big banking institutions, and yet are still regulated by OSFI. With an unearned reputation for bad lending practices, B-lenders may just prove to be the last hope for many BC homebuyers.