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Robert McLister: Alternative lenders often lend you more based on your overall ability to pay
Published August 16, 2024 • Last updated 12 hours ago • 5 minutes reading time
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Getting a mortgage can be difficult, but for some borrowers with a new cash-based side business, bank statements or letters of reference may be the only documentation needed. Photo by ASHLEY FRASER/Postmedia
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It is a story that is common throughout Canada.
People see falling interest rates and want to buy a home – perhaps because they believe prices will not stay low much longer – but cannot prove they have sufficient income to get a mortgage.
What to do? Well, unless you're an entry-level professional like a doctor or dentist, or you qualify for rigid niche lending programs, or you can get approved based on a significant net worth, the big banks will probably show you the door.
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Fortunately, large banks do not completely dominate the Canadian mortgage market. Alternative lenders will often lend you more based on your overall ability to pay. And that ability does not just depend on your current income.
Here are four ways non-Big Six lenders can help you qualify if your current income isn't enough.
1. Contributory income
Family members often contribute to the bills – think of the grandmother who lives in the spare room or your parents in the granny flat. These family members may not be registered on the land registry, but alternative lenders will take their payments into account when helping you apply for a mortgage.
Some lenders will also consider well-documented part-time or casual income (tradesmen, Uber drivers, etc.) without requiring the usual two-year income history.
“Canadians are great at finding creative ways to make more money for their family,” says Grant Armstrong, head of mortgage origination at Questrade Financial Group's Community Trust Company. “As lenders in these cases, we look for reasonable income that has a consistent pattern and can be documented for the past three, six, nine or 12 months.”
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For some borrowers with new cash deals on the side, bank statements or letters of reference may be the only documentation needed. Try to get this approved at a major bank, especially if you have a lower credit score.
2. Future income
For professionals such as doctors, dentists or lawyers, a future income boost is almost certain, and many lenders are willing to bet on it.
Even non-professional borrowers may have qualifying future income, including those who expect to make child support, alimony, rent or pension payments in the near future.
Even newcomers who have just started a Canadian business or are transitioning from a fixed salary to self-employment will find lenders willing to give them the green light. They just need to prove they have a secure source of income.
3. Liquid assets
Some lenders calculate how much you can afford, assuming you can convert your assets into cash. “If you have significant assets, we have programs that will help you leverage them over the next few years,” says Armstrong.
Cash, or anything that can be easily converted to cash, can help a lender justify exceptions to their debt-to-income limits (i.e., the maximum percentage of gross income a lender will allow for housing and debt payments). Some lenders even view RRSPs as a way to justify a higher loan amount.
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4. Future assets
Borrowers who have another property for sale, have a trust fund available, or expect an inheritance during the term of the mortgage have all future Cash availabilityAlternative lenders often consider a percentage of these assets as a means of servicing the debt or paying off the mortgage.
Some may even consider retained cash held in a business account, as long as it is unencumbered and you have full access to the money at all times.
The compromise
In life and with mortgage loans, flexibility often comes at a price. Alternative lenders charge higher interest rates due to the higher cost of securing funds and the greater risk involved.
Typically, borrowers who otherwise qualify pay low-credit lenders at least one to one and a half percentage points higher in interest, plus a one percent fee—assuming they have solid credit, at least 20 percent equity, and a marketable home. Less equity can drive your interest rate up at least another 30 to 50 basis points, if the lender even agrees to the deal.
If you have missed several payments in the last few years, your home is outside the city or in the suburbs, the mortgage amount is significantly over $1 million, or it is an investment property, you can expect significantly higher payments.
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And as for equity, it's critical for low-credit lenders. They require a hefty capital buffer as a hedge against the higher default rates typical of low-credit borrowers. It's the only way they can ensure they get their money back if things go wrong and the borrower defaults.
Generally, the worse your credit or income situation, the more equity you'll need, sometimes as much as 35 percent or more. Some lenders will allow a second mortgage behind the first, allowing you to borrow more, but you won't like the interest rate on that second mortgage.
The bottom line is that a mortgage broker has numerous tools to get a borrower approved. If you can't get this done at a bank but still want a mortgage, it essentially boils down to one question: “How exactly do you plan to make your mortgage payments today, tomorrow and a year from now?”
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Just because someone can get a mortgage doesn't mean they should. All of these workarounds are designed for people who can easily pay their mortgage. If you're even the least bit worried about that, keep renting.
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Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
Want to know more about the mortgage market? Read Robert McLister's new weekly column in the Financial Post and find out the latest trends and details on financing opportunities you can't miss.
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