The interest rate on loans can be challenging for those who do not have disposable monthly income or hold a poor credit score. But that does not mean they are not eligible for any form of mortgage or loans. Debt consolidation can help in these situations. If you are looking for information on debt consolidation, read more here.
However, a subprime mortgage loan has become a go-to option for such borrowers.
So, what are subprime lenders in Canada?
Subprime mortgage lenders and subprime personal loan lenders in Canada, are crucial in helping you out with subprime loans if you are in need. This article will focus on the details of subprime mortgages in particular.
A Quick Definition of Subprime Mortgage
A subprime loan is an amount preserved for specialty borrowers. These are people with lower-than-average credit scores and low monthly income. If you have a credit score below 640, you can avail of this loan. However, many subprime mortgage lenders accept credit scores of below 630 also. It varies according to the lender’s criteria.
These are highly professional lenders who can be your last resort. If traditional banks do not approve your application based on your low credit score or income, you can opt for these lenders.
It can be challenging for this income group to attain affordable interest rates on mortgages from banks. The interest rate of these prime mortgages is higher than regular mortgages’ to make up for the non-payment risk due to low income.
Moreover, these mortgages come with unconventional terms and conditions that are not part of regular mortgages.
Who are The Subprime Lenders in Canada?
Subprime mortgage lenders in Canada, also known as alternative lenders, are those who give you a second chance to obtain a mortgage. They are also known as B lenders who can support your mortgage application when credit unions and reputed banks reject it. Subprime lenders can help you get subprime mortgages at affordable rates, depending on your monthly income, commissions, and current credit score.
When applying for one, you need to remember a few simple factors. For example, it is best to approach a subprime lender after consulting with a bank about your mortgage. You can be living in the property you wish to mortgage or simply own it. It can also be a rental property.
The repayment timeline for this loan can vary from 5 months to 6 years, depending on your repayment status. You might receive 1% higher interest rates than banks, which can reach 5% based on your credit score and repayment history. However, loan approval is almost a guarantee with subprime lenders.
Types of Mortgages Under Canada’s Subprime Lenders
Subprime lenders offer three types of mortgages to people with poor repayment history:
1. Fixed-Rate Mortgage
With a fixed-rate subprime mortgage, you can enjoy one interest rate for the rest of your repayment duration. The interest rate does not change even when the prime lending rate surges and becomes unpayable. You can increase your repayment period from 30 years to 40 years by opting for the fixed-rate version of subprime mortgages. Not to forget, your monthly repayment amount remains the same even when the prime rate varies.
The only downside to this scheme is the payable amount. While you can benefit from a lower payment per month, extending your amortization to 40 years raises your total repayment sum. You might end up paying more interest by extending your repayment period.
2. Variable-Rate Mortgage
The variable-rate subprime mortgage has a lower interest than fixed-rate. Additionally, its interest rate varies according to the prime interest rate. So when the prime rate is high, the variable rate increases, and vice-versa.
Meaning, your repayment amount can rise and fall according to the market. The amortization period is a maximum of 30 years, within which you can enjoy reduced interest rates if the prime interest is low.
3. Interest-Only Mortgage
The interest-only mortgage scheme offers a short-term solution, where you can use your regular payments to clear off accumulated interest amounts. In a traditional mortgage, this is the amount you pay alongside the principal amount.
By choosing this scheme, you can benefit from reduced monthly mortgage payments. You can use the rest of your disposable cash to clear off your debts and improve your credit score. This way, you can enjoy regular mortgages in the future for all your other financial needs.
Criteria of Approval for a Subprime Mortgage
Since subprime lenders prioritize your property over repayment history, you can expect less formal paperwork. However, you will need to produce some documents for the assessment process. The following documents can quicken your mortgage approval:
- Your employment history documents
- Valid pay-stub documents
- Statements from your bank
- Your recent T1 Generals, tax returns papers, and Notices of Assessment (NOA)
- Your driver’s license, social insurance number, and passport (any 2 of these will do)
Do You Need a Subprime Mortgage?
Consider a subprime mortgage only if you are in desperate need of a home but have a low credit score or minimal income. It is one of the ways of mortgaging with bad credit. It is also advisable to opt for one only after discussing with financial professionals, as the repayment failure risks are high. In the worst-case scenario, you might end up losing your home if you cannot pay on time.
You will often come across some cooperative subprime lenders who can offer you near-affordable interest rates and repayment terms. The trick here is to assess and shop around till you find the best lender for yourself.
Subprime lenders are the last resort after you find it challenging to be approved for mortgages. Since people who take out subprime loans have a higher chance of default, the interest rates can be higher. Subprime lenders set this rate to stave off the non-payment risk factors.
It is always best to consult your mortgage broker before opting to mortgage your home. Consulting with professionals can help gather more information about subprime lenders in Canada.