How to Get a Mortgage With Tougher Bank Criteria

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As of January 1st, 2018, the Canadian federal government has introduced tougher standards on mortgage lending. Along with mandatory stress tests, these new standards reduce the amortization period for new mortgages from 30 years to 25 years, and reduce the amount of financing that banks can provide — from 85 percent of the home’s total value to 80 percent.

These new standards make lending less risky for banks, but they’ve also made it a lot harder for some Canadians to qualify for bank mortgages. In Ontario, many people are turning to non-bank lenders. According to a recent report, the number of mortgages refinanced through alternative lenders in the Toronto area rose by 67 percent between 2016 and 2018.

How Hard is It to Get Approved by a Bank?

Banks are required to put mortgage applicants through a stress test. To do this, the bank collects information about your total household income, the value of your existing assets, and any major outstanding debts that you have. The stress test determines whether you can reasonably afford a mortgage by applying your income and assets to a hypothetical mortgage with a similar structure to the one you applied for.

The bank will also use your household income and monthly expenses to calculate your gross and total debt service ratios. A debt service ratio shows how much of your total income is available to put toward mortgage payments. Your maximum gross debt service (that is, the gross amount you’re paying on a monthly basis) shouldn’t be more than 32 percent of your total income.

While stress tests are good for ensuring that you can afford your mortgage in the long term, they also project a worst-case scenario with a high interest rate. Under the tighter regulations, a stress test might disqualify you for the mortgage you’ve applied for, even if you can reasonably afford it at its current interest. Since a shorter amortization period means higher monthly payments, your gross debt service might have slipped above that 32 percent threshold if your income hasn’t changed in the past few years.

Banks may turn you down if you have bad credit, or if the property you want to mortgage doesn’t meet certain subjective standards. Getting approved for a mortgage can also be tough if you have non-T4 income — for example, if you run a business or are self-employed.

What Are the Alternatives?

The government regulations introduced in 2018 only apply to banks. While other credit lenders can utilize these regulations, they aren’t legally required to. Because of this, if you were turned away from a bank, there’s a good chance that you can still get approved for a mortgage loan through an alternative lender.

Alternative lenders are a good option if you need short-term refinancing to cover living expenses or renovation costs; if you’re looking for a second mortgage; or if you need a bad credit mortgage loan.

Because alternative mortgage lenders deal with riskier loans, their interest rates tend to be higher. But if you can’t get approved by a bank, paying higher interest rates over a shorter period may be a viable tradeoff.

Private Lenders

A private lender can be a small investment firm or an individual. Private lenders can offer short-term private loans, usually with a term between 1 and 3 years.

Because the individual mortgage loans are smaller, private lenders can afford a bit more risk. They often look at the suitability of the property being mortgaged before looking into your personal finances, something that can be advantageous if you have outstanding debts or uncertain income. Properties that aren’t eligible for bank mortgages, like small condos, can be mortgaged through alternative lenders.

Bridge Loans

If your long-term goal is still to qualify for a bank mortgage, private lenders can also offer short-term loans called bridge loans. These are especially useful if you have bad credit and are in the process of buying a home. A bridge loan is a small, temporary loan that can be taken out in the event that your purchase of a new home closes before you’ve managed to sell your old one. This loan “bridges” the gap between the price of a mortgage on a new home, and the sale price of the old home.

Research Your Lenders

When discussing alternative mortgage options, it’s a good idea to do some research and make sure that your lender is reputable. Look for reviews and compare rates with similar lenders. It is important to fully understand the terms of your mortgage commitment and ideally have a lawyer explain all the documents to you. Make sure you plan for the future, as well. If you are unable to afford a high-rate alternative mortgage in the long term, it may be best to sell the property before the lender can. A good lender will listen to your concerns and will be able to customize the mortgage to meet your unique needs.