Getting a Mortgage with Bad Credit in Canada

For a long time, the established convention in Canada was not to provide mortgages or housing loans to borrowers with bad credit. Canadians typically rely on large, well regulated banks (compared to the U.S., where there are many small-scale banks for consumers to choose from), which equate bad credit with high risks. Therefore, for many middle to low income Canadians, owning a home was nothing more than a dream.

Canada's Mortgage Market is Changing

However, things have begun to change in recent times. Canadian banks have begun to adopt methods similar to subprime mortgages in the U.S. in order to provide loans to borrowers with bad credit. While the large, traditional lenders may still be off limits to many borrowers with bad credit, there's a growing market of small lenders with increasingly relaxed standards for mortgages. This means borrowers with bad credit do not have to stop longing for a home of their own.

These small-time lenders who offer mortgages for bad credit are commonly known as near-prime lenders, ALTA lenders or alternative mortgage lenders. Even borrowers with good credit who get their mortgage applications turned down by big banks, because they do not qualify for CMHC insurance, can consider these alternative mortgages. These mortgages are also ideal for recent immigrants, newly employed or those with no credit history that large banks tend to overlook. Alternative mortgages often require a guaranteed source of income in the form of a full-time job. Compared to borrowers with good credit, who usually only need to pay 5 to 10 percent as down payment, borrowers with bad credit have a higher interest rate with a down payment between 15 to 20 percent. Some lenders may require a co-signer with solid credit history as well. These stringent requirements are there to protect creditors and debtors alike.

Mortgage Lenders for Bad Credit

For borrowers with bad credit, who have a steady source of income, funds at hand for a down payment, and preferably a co-signer, here are the best places to get an alternative mortgage:

Premiere Home Mortgage Ltd.

This small-time lender provides alternative mortgages based on the equity (value) of the home a borrower wants to buy, rather than based on his or her income or credit. This company's business is explicitly explained by their slogan: 'We say YES when the banks say NO!' Potential borrowers can apply online, calculate mortgage using a web tool, and also get a free quote. The company promises two-day approval for those who qualify. The only caveat is that, currently the company's operations are restricted to property in British Columbia, Alberta and Manitoba.

Canadian Mortgage Finder

This company specially offers bad credit mortgages in packages titled as such. The company guarantees that clients will not be turned down because of low credit. Borrowers can directly apply online and get approval with sufficient down payment and proof of income. This company offers 10-year contracts starting only at 3.89 percent of interest. Their prime rate is 3 percent and variable rate is 2.65 percent. In addition to bad credit loans, borrowers can refinance existing mortgages, get funds to save homes from foreclosure or consolidate debt.

FamilyLending Inc.

This company offers residential mortgages and commercial property financing with both fixed and variable rates starting from 2.3 percent. Potential customers can easily get estimates for loan rates using their online mortgage calculator. Proof of income and at least 5 percent of the down payment is necessary to be eligible. The higher the down payment, the higher the chance of approval. Before taking out a bad credit mortgage, consider alternative options such as improving credit by paying off your debts.

Helpful Reads

How to Consolidate Unsecured Debt Using a HELOC

Unsecured loans, such as payday loans, credit cards, personal lines of credit, store purchases made on credit, have a tendency to pile up. Because they have no collateral involved, most borrowers end up struggling to pay down the balance due to high interest rates. One of the foremost reasons for individual bankruptcy is unsecured debt. Therefore, the faster they are paid off, the better off the borrower's credit would be. Unsecured debt is notoriously difficult to pay off without a quick and sharp rise in income. HELOCs are one of the few ways to pay off personal debt. Read ahead to find out what HELOCs are and how they can help you with your unsecured debt troubles.

What is a HELOC?

HELOC is an industry acronym for home equity line of credit. Home equity refers to the value of one's home. A home equity loan is a type of consumer loan where homeowners can borrow money against the value of their house. This is commonly referred to as a second mortgage. Home equity loans are highly popular because homeowners can borrow up to $100, 000, depending on the home's equity and market value, and then deduct the interest from tax returns.

Basically, there are two types of home equity loans: fixed rate and line of credit. Fixed rate home equity loans are paid over a period of time during which the interest rate remains the same. Line of credit home equity loans, or HELOCs, come with variable interest rates and are paid off monthly like a credit card bill. In fact, a HELOC works a lot like a credit card. A borrower is cleared for a certain amount to spend monthly using a card or a check. However, this amount doesn't necessarily have to be repaid the following month. Unlike credit cards, HELOCs are only approved for a limited time. When the time is up, the borrower has to repay whatever is due in full. HELOCs are offered to responsible borrowers with a steady source of income. HELOCs are an ideal way to borrow a large amount of money to finance an expensive venture like a college degree, emergency home repairs, or to pay down existing debt by consolidating multiple loans with interest rates into one lump sum plus interest.

Pros of HELOCs

- Low Rates - The variable interest rate for a HELOC is low in general and can be paid over a long period of time instead of making a one-time payment.

- Tax Deductible - Under certain circumstances, it is possible to get a tax deduction on the interest rate paid for a HELOC fully or at least partially. For example, tax deductions are not impossible with legal assistance if the HELOC funds were used to start a business or to invest.

- Flexibility - HELOCs are a flexible type of loan that can be used to fund a large purchase. They offer easy access to credit without stringent requirements.

- High Limits - HELOCs tend to have high borrowing limits, which in some cases can be as high as 85 percent on the equity of a home.

Cons of HELOCs

- Home is Collateral - The biggest caveat of a HELOC is that the borrower's home is on the line. If for some reason the borrower is not able to repay the loan, he or she will lose shelter.

- Encourages 'Reloading' - Reloading is a term used to describe the constant borrowing and spending cycle to pay down high-interest generating debt. The ease of HELOCs can sometimes reinforce this type of irresponsible borrowing.

How to Use a HELOC to Consolidate Debt

Taking out a HELOC to pay down multiple unsecured debts is relatively easy. First, borrowers have to consolidate all the loans into one single lump sum with an interest rate to match. Then, the borrower will be required to make monthly payments. Often these monthly payments are larger than individual loans and the interest rate can also be higher. Most borrowers cannot afford such expenses on their existing income. Therefore, after consolidating the loan, the borrower can apply for a HELOC to find the amount needed to consolidated payments on a monthly basis. Once approved, the borrower can then commit to several years until the unsecured debt is completely paid off. When taking out a HELOC, borrowers are strongly advised to spend the funds responsibly. If you are taking out a HELOC to pay down unsecured debt, use it only for that purpose, nothing else.

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