What is Alternative Lending and is it Good for Me?

Pam and Chris were referred to us by a lawyer in Burlington. Chris had attempted to open a new business but after several unsuccessful years, he closed the enterprise and unfortunately went bankrupt. The fallout of the business continued with past creditors and the government looking for past debts and taxes. They all went for their personal assets and specifically, the equity in their home.

They had previously sought financial assistance from another broker. However, the costs were more like visiting the Sopranos. After visiting me and Sean, they realized their cash flow and equity were actually good. The issue was the credit. If we could patch up the credit after a year, we could seek better mortgage rates for the rest of their lives. The couple agreed to our plan which was to find alternative financing, build their credit score and eventually transfer them to a financial institution that offered decent rates. Pam and Chris had an exit strategy, which was to absorb the higher rates but to eventually switch back to the A-rates.

If you have not figured it out, alternative lending is a fancy word for non-prime rates or higher rates. It essentially means that you do not qualify for a mortgage at the prime 6 banks in Canada or with the quality mortgage lenders.

The reasons can be many but they can include the following:

1. Bad credit
2. New immigrants to Canada
3. Self-employed
4. Fast access to capital
5. Raw land financing
6. No need for extensive documentation or paperwork

In these cases, alternative lending will be suggested. What types of alternative lenders exist? Well it varies, in fact, it can make a huge difference. Let’s take a snapshot of these lenders.

1. B-Mortgages: This is the best option for most consumers as the rate is generally only 2-3% above prime mortgage rates. Fees are added, which are generally 1% of the lending amount. Eg. A $300,000 mortgage = a $3000, one-time fee.
2. MIC: A MIC is a Mortgage Investment Corporation. These rates tend to be higher than a B-mortgage (above). The key here is to have equity in the home and show some ability to make payments.
3. Private Mortgage: These are private individuals or, in some cases, private corporations who will lend you the money but again, at what cost in terms of rates and fees.
4. Second Mortgages: These are considered the most dangerous types of mortgages. Why? You are in second position behind the first mortgage which means if the client is in default, the second mortgage holder is the last to be paid out. Rates can go from 8-19% in fees. In most cases, the second mortgage rate is between 11-14% with gigantic fees.

As a consumer, they can be helpful because in life, bad things happen to good people. If these negative situations happen, ask yourself one thing: can I get out of this in 1-2 years. If the answer is yes, that is an exit strategy and alternative financing may be good for you. If your problem may persist (loss of job due to health, lack of income, etc.), than you may need to seek guidance for an alternative solution).

Chris and Pam took a B-Mortgage and a private second. After a year of flawless payments, they will refinance with a primary lender. What will their monthly savings be? They will save $1300 in pure cash flow per month. It was not easy but they were focused and most importantly, had a plan to get out of the high-priced financing. Unless you do not have an exit strategy, think twice about alternative lenders.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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