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If getting a mortgage has been a challenge for you, alternative lending may help you get a mortgage to suit your unique needs.

High home prices and rising interest rates may challenge some Canadians to get a traditional mortgage. For some borrowers, alternative lending may provide a solution to help them realize their home ownership goals.

What is alternative lending?

Every year in Canada, 3 out of 4 homeowners get their mortgage from one of the ‘Big 6’ Banks. Early in the process, a mortgage professional will work with a borrower to determine how much they can afford. This is based on factors like your down payment, household income, monthly spending, and existing debts. Sometimes these criteria can be challenging for borrowers, like those with shorter employment histories, lower credit scores, or variable sources of income. In these situations, a mortgage from an alternative lender may be a good fit.

Who are alternative lenders in Canada?

Alternative lending is offered by various financial institutions and companies. These include smaller banks, trust companies, mortgage finance companies, credit unions, and private lenders. Some alternative lenders are regulated by the Office of the Superintendent of Financial Institutions (OSFI) — the same federal regulator that supervises traditional large banks; others may be supervised by provincial regulators.

In some cases, larger banks have referral relationships with reputable alternative lenders. They help clients by connecting them with lenders suited to their financial circumstances.

How is alternative lending different?

Alternative lenders may provide greater flexibility regarding certain loan requirements like credit score and income. These lenders typically offer shorter terms, allowing homebuyers time to improve their financial situation.

The main trade-off to alternative lending is typically a higher cost of borrowing. Often alternative loans come with a one-time fee. This fee averages between 1 and 2 per cent of the total mortgage loan and a moderately higher interest rate. Some alternative lenders offer extended amortizations. These could help lower your mortgage payments but result in more interest paid over the life of the mortgage.

When should I consider alternative lending?

The decision to use alternative lending is primarily about balancing the ability to get a mortgage now (as opposed to waiting for your financial circumstances to change) with a higher borrowing cost. A good strategy for customers who use alternative lending is to keep improving their financial profile, then switch to a conventional mortgage lender once their circumstances permit.

The Bottom Line

Getting approved for a mortgage can feel overwhelming — but you don’t have to go through the process alone. Experts can offer personalized advice and help you understand the best route for your unique financial situation. An RBC Mortgage Specialist can take the time to understand your financial situation and help you explore how to make your home ownership goal a reality.