Subprime Mortgage in Canada — The Full 2021 Guide

Keys to understand what is a subprime mortgage and whether it’s is the best option for you. 

Subprime mortgage or subprime lending is a type of lending which imposes greater risks for the lender and harder conditions for the borrower. 

Usually, a subprime mortgage is granted to people unable to qualify for a prime mortgage. 

Meanwhile, with a minimum credit score above 600 and housing prices constantly rising, more people are recently opting for subprime mortgages. The Canadian housing market has been soaring despite any expectations, even during the pandemic. 

What is a subprime mortgage?

Subprime mortgages are usually considered loans with a higher interest rate. A bigger percentage of the rate is some kind of compensation for the greater risks the lender takes from a borrower with damaged or poor credit. From the lender’s point of view, harder terms can guarantee the offset if the credit is not paid back. 

From the borrower’s point of view, a subprime mortgage is a much more available option if your credit reputation is damaged and you carry a risk of not being approved for a conventional loan. Recent data shows that since the beginning of the pandemic, house pricing in Canada has risen by 21%, leaving millions of middle-class Canadians not being able to afford a 20% conventional down payment.

Who may need a subprime mortgage?

A subprime mortgage is not the first option that comes to mind if you want to access mortgage funds. At the same time, when being qualified for a mortgage, prime lending structures usually consider a wide range of factors to check if the borrower is meeting standard lending criteria.

First and foremost, these are the individual’s credit history and sources of income. Mostly, prime lending structures, such as big banks and credit unions, prefer to deal with individuals with a high credit score near 700 and above. Stable salaried employees, having a long-term relationship with the same employer (of at least two years), and providing a stated income and other proofs of payment capacities are considered more reliable clients. 

While you could qualify your income rather as seasonal, freelance, or self-employment, most probably, you will need to consider subprime lender’s products.

Not all of the requirements are settled by the banks themselves. Big banks fall under the purview of the Office of Superintendent of Financial Institutions, which obliges banks to check if the borrower can pass the mortgage stress test aimed to protect the Canadian housing industry. 

Previous credit-related activity is also one of the main factors of risk. Poor credit, bankruptcy, consumer proposals in the past – all of the above are damaging your credit score and make you a less reliable borrower for prime lenders. 

Though if you are new to Canada and lack a credit history at all, it also can serve as a negative factor and affect your possibility of being approved for a prime mortgage. With an impaired score under 520, 3% of Canadians fall into a credit category of “extreme risk” and can hardly obtain a mortgage loan. 

Finally, the property itself can cause problems while approving for a credit. A unique type of reality can sometimes be considered unreliable for a prime mortgage. If you try to purchase a houseboat, a mobile home on rented land, or another non-basic type of property, it can cause difficulties while approving a loan and lead to a mortgage refusal. 

The refusal itself won’t worsen your credit score. However, it still can have an impact. One unsuccessful attempt in getting credit can lead to more tries. As a result, your credit history will save track of so-called hard inquiries that companies make when you apply for a loan. Though your credit report will show only the facts of your application and nobody can check if you were approved or denied, many recent inquiries specially made in the short term could make you look like a credit risk. 

If at least something of the mentioned is your case, a subprime mortgage can be your best and easiest way to access a mortgage. 

Who are subprime lenders in Canada?

Subprime lenders are private financial structures not regulated by the same legal framework as Canada’s chartered banks and credit unions. As a consequence, they can provide services to people with more complicated financial circumstances. 

After the 2007-2008 housing crisis, which has affected Canada and the US, subprime lenders have acquired a bad reputation. 

In effect, some subprime lenders show predatory behavior on the subprime market and seek to exploit borrowers who have no other option than a subprime mortgage. However, there are still many reputable lenders who provide valuable services. About a third of 30 million active consumers in Canada have “below prime” credit scores. However, the country manages to perform signs of healthy non-prime credit performance. 

Benefits and downsides of a subprime loan

Subprime mortgages are openly available. More than 1 in 10 of all mortgages in Canada are qualified as subprime. 

A subprime loan is easier to get than a regular one, and subprime lenders tend to be less risk-averse. However, it’s necessary to consider that the terms of such a mortgage would be tougher. 

The possibility to improve your credit history is a second main benefit of a subprime mortgage. With on-time payments and finally paying off the mortgage, you will be able to repair your credit history and, over time, improve your credit score. In perspective, it will help you to qualify for a regular mortgage. On the downside, missed payments will only cause negative effects on your reputation as a borrower. 

Terms and conditions of subprime mortgages

Specific terms of the loan are always individual and depend on the conditions of the lender’s product and the borrower’s circumstances. However, there are some general tendencies. 

While the life of the loan is relatively short, about six months to close the mortgage, the average interest for a subprime mortgage tends to be from 1% to 3% higher than for a conventional one. 

The standard down payment required for this type of mortgage would be around 15% of the property’s value, and loan origination fees will usually track from 2% to 3% of the borrowed amount. 

If you decide to apply for a subprime loan

Eligibility criteria for a subprime mortgage are usually less strict compared to conventional ones. 

Amid general requirements are: 

  • Age of majority (can vary from 18 to 19 depending on the province of your residence) 
  • Canadian residency 
  • A property to secure the mortgage against. The property’s value is the main factor, which must ensure the possibility of a release in case of failed payments. 

Other factors such as an income level, outstanding debts, credit score, size of down payment, and employment will most probably not impact your eligibility for a loan, though it would affect your interest rates. 

Your interest rates will also depend on multiple factors. One of the main concerns might be your credit score and financial circumstances. A low-income level, the small size of down payment, and other factors may also result in the rise in the interest rate of the mortgage you apply for. 

Documentation required to apply for a subprime mortgage

General requirements will include: 

  • Your ID; 
  • Proof of address; 
  • Information about the property you plan to mortgage (valuation, purchase details, and others). 

The list of documents you need to gather will also include all types of financial documentation to prove your payment capacities. Amid those: 

  • Pay stubs; 
  • Employment letters; 
  • Previous tax returns to demonstrate the income history; 
  • Notice of assessments; 
  • Other financial documents are. However, proving assets and liabilities. 

Once all necessary documentation is gathered, you must fulfill an application form and submit it to the lender for approval. Sometimes to make a decision, the lender requires additional documents before qualifying you for a loan. 

Is a subprime mortgage the right choice for you?

Choosing in favor of a subprime mortgage and the prime one means to be sure that you can afford house ownership. The subprime mortgage will let you purchase a property even if you will probably get denied by prime lending structures. However, it doesn’t mean it will be easier to pay it back, and the mortgage conditions are harder. 

Taking into consideration the changing situation in the labor market where people are more often either self-employed or opting for unconventional jobs and have had bankruptcies in their past, sometimes a subprime mortgage is one of the best options to get access to the mortgage funds even if you’re not a conventional borrower.

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