Don’t get a private mortgage without an exit plan

If you've tried to get a mortgage through one of the country's big six banks but found yourself unable to meet their strict qualifying standards, an alternative lender could be a solution—but make sure you know the risks involved.

Driving the news: As interest rates keep the cost of borrowing high and the mortgage stress test becomes tougher to clear, buyers and homeowners are turning to alternative mortgage lenders to get their foot in the door.

  • 33% of borrowers renewed their mortgage with an alternative lender in Q3 of 2022—up 4% from the previous year's share.

  • That may have been necessary if they couldn’t qualify with a conventional lender, but it could end up costing more—alternative lenders often charge higher interest rates and lender fees.

Why it's happening: Alternative lenders specialize in taking on business the banks turn away. If you've got hefty debts, bad credit or are self-employed with an "unconventional income," an alternative lender will work their magic to get you qualified. 

  • Banks have more stringent rules and requirements for who can be issued loans based on how your income and debts measure up.

  • Alternative lenders can be way more lax about this stuff, with some issuing loans to people with a credit score of 500. 

Why it matters: As housing has become more unaffordable Canadians have embraced alternative lenders—the industry grew from $9 billion to $15 billion over five years—but almost all financial experts say a private mortgage is a short-term solution, and an exit strategy is critical.

  • An exit strategy could be transferring your mortgage to a traditional bank or selling the property.

  • Due to higher interest rates (10 to 18% vs 1.5 to 5% from traditional lenders) and fees that can cost up to 5% of the total mortgage, you don't want to stay in an alternative mortgage for more than three years.

 Bottom line: Alternative lenders can help you start your homeownership journey, but the sooner you split with them, the better. The increased costs can add up big time and they are much quicker to take action for non-payment—80% of foreclosures in Ontario were properties with private loans.