Why ignoring alternative lenders is a mistake: What you need to know
As a mortgage broker, you’ve developed relationships with many lenders. Do you have alternative lenders on your contact list? If not, now is a great time to explore what they have to offer and get that relationship going.
Let’s face it, not all your clients are going to have a double income and full-time employment with T4s and a letter from their employer. Some are going to be self-employed or rebuilding their credit. Some may be carrying more debt than is ideal. Others may be looking to purchase a second property for rental income. It’s these clients who need you the most because you can connect them with a lender that will understand their unique circumstances—alternative lenders.
Three types of lenders: A lenders, B lenders & private lenders
You’re familiar with the traditional lenders, sometimes called A lenders. These are the “big banks,” which are federally regulated, and many of the provincially regulated credit unions. The banks must (and most credit unions choose to) ensure that a borrower would be able to make their mortgage payment based on the Bank of Canada’s qualifying rate—otherwise known as the stress test. Can your client afford to make the payments if their interest rate was higher?
Alternative lenders are sometimes called “B lenders.” There are a lot of smaller regulated banks in Canada, like Bridgewater Bank, that factor in the borrower’s circumstances. They are willing to take on a bit more risk so they can work with your clients to help them qualify for a mortgage. These banks still look at income, credit history and debt servicing ratios, but they also understand that not every person has a traditional income or perfect credit history and they’re willing to work with that.
Finally, there are private lenders, which tend to be unregulated. They are not subject to many of the same rules that govern the banks. This is reflected in their rate and fee structures.
Private lenders and alternative lenders are sometimes lumped into the same category, but they are very different. Regulated alternative lenders must meet Canada’s mortgage stress test guidelines just as the big banks do, and your clients must still qualify. Private lenders have no such restrictions. That, in combination with higher rates and sometimes unusual or restrictive contract terms, could cause problems for mortgage holders down the road.
The alternative lending market is growing
There’s really no reason to avoid alternative lenders for your clients. In fact, it’s an opportunity for brokers to better serve their clients.
Statistics Canada reports the value of residential mortgage loans extended by non-bank lenders grew by 25.4% in the second quarter of 2019. While this includes both alternative and private lenders, the market share for alternative lenders is growing.
Many people are still more comfortable with one of the traditional banks. This may be because they have a relationship with their bank where they hold a chequing account or they just aren’t familiar with the benefits of alternative lenders. As a mortgage broker, you are in the best position to help your clients understand why an alternate lender may be their best option, and you can help manage their expectations about the rates available to them.
You may wish to go a step further and develop a niche market for your broker services. What type of client would be a relatively good risk but still require the services of an alternative lender? For example, if you want to help the self-employed client, how and where could you advertise your services to make it known that you can help them put together a mortgage deal?
It would be a smart idea for every mortgage broker to become familiar with how alternative lenders work, and an even better idea to develop a working relationship with a reputable and trusted alternative lender. Although there is a bit more work in putting an alternative mortgage deal together, finding that solution is rewarding for both you and your client.
Remember, alternative mortgages tend to have shorter terms, and your client will need to renew their term in a year or two. It’s well worth your time to build a strong relationship and keep in touch, whether you’re just checking in or offering advice. When the time comes to renew their term, they’ll likely seek your services again to help them find the right lender for their next mortgage term.
You build a solid reputation with your clients through your relationships with them. Not only will they continue to come back, but they may also refer their friends and family to you or provide positive reviews that will help you build your client base.
Clients who may benefit from alternative lenders
You probably have several clients on your list that would struggle to qualify for a mortgage with a traditional bank—and there’s nothing wrong with that. It just means they can’t meet the more rigid guidelines these banks must follow. An alternative lender may be a great choice for a client who:
- Is self-employed or has a non-traditional source of income.
- Owns investment properties.
- Is looking to purchase a second home.
- Is rebuilding their credit after a significant life event.
- Has higher debt servicing ratios.
- Has dealt with a bankruptcy or consumer proposal in the past.
An alternative lender wants to know the story behind your clients’ finances and will consider that when evaluating the mortgage deal you’re putting forward. For this reason, an alternative lender may be your client’s best chance at realizing their homeownership goals.
And don’t forget to emphasize that a mortgage with an alternative lender is temporary. Your clients will typically use this lender for a year or two. By the end of their term, they may very well be ready to successfully apply for a mortgage with a traditional lender.
Develop your skills as a broker
Brokers who expand into alternative lending deals learn how to help a wider variety of clients. You’ll get a great perspective on how income and debt ratios equate to financial health, and you’ll broaden your tax and accounting knowledge.
Alternative mortgages are a growing part of the landscape, especially as the face of employment changes and more people have non-traditional sources of income. Your expertise in alternative lending will demonstrate that you are keeping up with market trends and can provide the best advice to your clients.
Here are some common-sense solutions for real-life deals Bridgewater Bank has approved and funded.
You may also find the following articles helpful in explaining alternative lending processes and rates to your clients:
Benefits of working with Bridgewater Bank
Alternative lenders like Bridgewater Bank value relationships with their mortgage brokers. We know there is a bit more work involved in putting together a mortgage deal for clients who require alternative lending services, and we encourage brokers to develop a relationship with our business development managers and underwriters.
We listen to what our brokers need from us and we offer support and solutions. Also, we’ve built a large collection of resources for brokers to use for their information or to share with clients.
Ask how we can help
If you have questions about how our rates and mortgages can help your clients, contact us and talk to one of our underwriters or business development managers.