A subprime mortgage is a type of mortgage that is offered at a higher interest rate, due to the borrower being considered higher risk.
The risk usually stems from subpar credit ratings and/or the lack of reliable income streams.
To compensate for the greater risk of default, lenders assign higher interest rates and impose more stringent terms and conditions on subprime mortgages.
Canadian Banks and Subprime Mortgages
Traditional banking institutions like the Royal Bank of Canada (RBC) and Scotiabank don’t offer subprime mortgages. Most credit unions and mid-sized banks stay clear of subprime mortgages, as well.
Collectively, these financial institutions are referred to as “A Lenders.”
Generally, A Lenders cater to borrowers with solid credit scores and reliable incomes – those less likely to default on their mortgage payments.
They are well-established firms with great reputations and adhere to strict banking regulations and lending practices (such as the mortgage stress test).
In Canada, subprime mortgages are the domain of lenders known as “B Lenders.”
These firms exist to serve borrowers who don’t qualify for a traditional mortgage.
They aren’t bound by the same regulations that govern A Lenders such as banks and credit unions, thus offering borrowers less stringent qualification criteria.
Key Insight
According to an estimate by TransUnion, about 11.9% of Canadians credit is characterized as subprime, meaning they won’t qualify for the same mortgage at a traditional lending institution.
Subprime Mortgage Lenders in Canada
Here are some notable Canadian subprime mortgage lenders:
Equitable Bank
Equitable Bank originally made its debut in 1970.
It provides various financial services in Toronto, including commercial loans, bank accounts, and residential mortgages.
To apply for mortgage financing, you’ll have to set up an appointment with a mortgage broker.
First National
Like many subprime mortgage providers, First National is a mortgage finance company (MFC).
Its business model centres entirely around mortgage lending; they don’t offer traditional banking services like chequing accounts or investment planning advice.
First National has the distinction of being the largest MFC in Canada.
Metrix Financial
Metrix Financial provides subprime mortgages through its NPX program, which caters to individuals with poor credit scores, recent immigrants to Canada that have little credit history, or those who are self-employed.
Applicants with credit scores as low as 500 can apply, and terms range from 1 to 3 years.
MCAP
MCAP is one of Canada’s most prominent MFCs, boasting over $140 billion in assets under management.
They offer residential and commercial mortgages, in addition to providing financing for construction projects.
For those looking for a residential mortgage, there are plenty of flexible financing options available through MCAP’s suite of products, which offer a wide array of features.
These include one-year terms, 30-year amortization periods, complimentary lines of credit, and the option to extend your mortgage term without a penalty.
Did You Know?
A dramatic rise in subprime lending (from 8% to 20% in only a few years) in the U.S. was one of the proximate causes of the global financial crisis of 2007-2008.
Prime vs Subprime Mortgages
The interest rates set on a subprime mortgage are typically between 1% to 3% higher than what you’d find on a comparable prime mortgage.
Subprime mortgages also offer far fewer features than prime mortgages and come with more restrictions.
While prime mortgages are readily available to the public through traditional lending institutions, subprime mortgages are tougher to source as the firms that offer them are more obscure.
Typically, you’ll have to employ a broker to gain access to subprime mortgage lenders’ services.
Here’s an overview of some of the other key differences between the two mortgage types:
| Prime Mortgage | Subprime Mortgage | |
|---|---|---|
| Minimum Credit Score | 650 – 700 | 500 – 640 |
| Stress Test Required | Yes | No |
| Maximum Amortization | 25 – 30 years | 30 – 40 years |
| Typical Term Length | 5 years | 1 – 5 years |
| Down Payment Required | 5% – 10% | 15 – 20% |
Getting a Subprime Mortgage
You should seek out a subprime mortgage if your financial standing is such that you don’t qualify for a mortgage at a traditional bank or credit union.
Ideally, though, a subprime mortgage should serve only as a temporary solution to help you acquire a home.
Strive to get your finances in good order so that you can eventually graduate to a prime mortgage, which offers more features and a lower interest rate.
If your financial situation is so dire that you’re teetering on the brink of bankruptcy, it’s best to avoid any new debt – the steep payments can quickly push you over the edge.
Ensure your budget can accommodate subprime payments before signing on the dotted line.
