With tightened lending guidelines in the Canadian market and no signs of lessening desire of home ownership, customers are continuing to explore their options with respect to obtaining mortgage financing.
The major banks have dominated the Canadian mortgage market for a variety of reasons. What options do Canadians who can no longer fit within their beloved banks' guidelines?
Let’s provide a scenario that might look familiar to many Canadian households:
Thomas and Susan are newlyweds looking to purchase their first home together. Thomas works as a contracted truck driver with an annual income of $85,000. Susan is a recent graduate and has landed her first full time teaching position. She was working with her current employer on a part time basis for one year prior to being offered a full time position. She is making $50,000 a year. Thomas and Susan are excited and schedule an appointment with their bank with whom they have been clients since they were children. Both are conservative; paying off their credit cards in full each month. They are looking to purchase a property at $675,000 in Mississauga, Ontario and have a five percent down payment. Sadly, things did not go as the happy couple had expected. The couple was declined by their bank for a few reasons that we will explore below:
- Thomas writes off a lot of his business expenses and actually files an income of $23,760 annually. Thomas has done nothing wrong by doing so. His bank statements prove the deposits that reflect his actual earnings before expenses.
- Thomas is employed on a contract basis, meaning he will require a minimum down payment of 10%, as opposed to traditionally employed individuals who can purchase with 5% down. He was not aware of this critical factor.
- Susan has an excellent repayment history on her credit accounts, however, her job tenure is short and she still owes $35,000 in student loan debt. That changes the affordability to the file.
Looking at the surface of this couple, you could assume that they would have no challenges with purchasing their dream home. It is probably best to even assume that many bank employees could see how this is the type of couple that would have concerns with their mortgage payments. They have income, they have set careers, and they have been responsible when it comes to their debt repayment.
Let’s explore the opportunity through all of this:
Allow the precedent to be set with this: CIBC reported in an analysis report that alternative lending institutions represent 2.2% of the overall market. There are alternative lenders with a strong focus upon lending options to individuals
who do not have ideal credit or income situations as per the Canadian chartered banks' standards. Many of these individuals are like Thomas and Susan. They are responsible, they have income and dependable career choices, and they have no intentions of ever defaulting. Yet, they were turned away.
Here is what can be done to get these newlyweds into their first home purchase:
- With Thomas being self-employed, there is no getting around their requirement for a minimum down payment of 10%.
- Alternative lenders can qualify self-employed clients by way of taking an average of their most recent 6 months bank statements. The figure that is obtained through that calculation has merit. This is one way to mitigate the income concern with Thomas.
- There are alternative lenders who will allow homeowners to purchase with both a first and second mortgage option with rates that are reasonable in order to close the deal. These are not always clients in horrible situations.
Here is how this couple was able to break into the Canadian Real Estate Market:
The couple purchased a three bedroom townhouse for $650,000 in the suburbs of Mississauga. They were able to increase their down payment to twenty percent through a gift of ten percent from Susan’s parents and Thomas withdrew the difference from his RSP. Before you respond with the fact that many do not have the ability to obtain such a gift from their parents, we will agree that they are extremely fortunate. The point is to express this particular couple and how they overcame.
What they were offered:
The clients obtained a mortgage in the amount of $520,000 with an interest rate of 2.99%.
Although the rate is a little higher than what the bank may have offered them, with shorter full time employment tenure for Susan and with Thomas being self-employed, this mortgage makes sense.
Why does this matter?
There are a few things to be considered when you are ready to begin your home purchase:
- A mortgage professional works with both the chartered banks and alternative lenders. They will be prepared to provide you with all of your options.
- They can help you prepare for home ownership in advance with the understanding of many lenders expectations. A bank can only offer you their own products. Not the most advantageous.
It appears as if the tide has turned which is great for both brokers who are excited to get in the game and also Canadians; even if they have been convinced that banks are their only option.