Why are many Canadians considering alternative lending options?
Alternative Lending (alt-lending) is a quick and convenient solution for many Canadians looking to purchase their first home in 2022.
While traditional banks have strict requirements and long application processes, alt-lenders can typically provide loans much quicker and easier.
Acquiring loans for mortgages and refinancing from traditional bank lenders is becoming more and more challenging for many Canadians with the steady increase of interest rates, inflation and overnight lending rates becoming difficult to manage.
Buying a home can be stressful – and with so much to juggle already, it can help to have a Mortgage Broker in your corner who can provide you with all of your options.
It’s becoming more common for Brokers across Canada to recommend alternative lenders to borrowers who need short-term financing.
What role does the Bank of Canada play?
The Bank of Canada (BOC) is responsible for helping to protect the Canadian economy by applying monetary policy.
With supply chain issues and the steady rise of inflation, the BOC finally raised the overnight lending rate from 0.25% to 1.00%. A 0.25% rate increase lowers the purchasing power by approximately 3.00%.
Inflation is affecting the economy, and therefore Canadians across the country, so it’s expected that the BOC will continue to gradually raise the overnight lending rate through 2022 and even into 2023.
Will the increased overnight lending rate impact my mortgage or refinancing rates?
The prime mortgage rate will most likely increase as the overnight lending rate continues to increase.
This means that variable mortgage rates and variable home equity lines of credit will increase as well.
Conversely, fixed mortgage rates aren’t affected by the prime rate as set by the BOC – chartered banks determine fixed rates based on the bond market.
Earnings that chartered banks make on the interest from their investments in bonds is what determines their fixed mortgage rate – the money that they acquire from bonds is used to offset any financial loss from their mortgage investments.
Though bond market rates are out of the control of a borrower, they do have the agency to choose their mortgage lender – when they work with a reliable Mortgage Broker, they can go over all of their options to make the best possible decision.
When will my Mortgage Broker recommend alt-lending?
Alt-lending can be useful for pre-sale purchases, if the borrower is self-employed, during a divorce, when dealing with family estates, if they manage rental properties and more.
For a pre-sale purchase, alt-lenders can lend off the property’s current value, rather than the value that the home was purchased at – it’s common for pre-sale properties to have appreciated in value by the time the deal has been completed.
Therefore, financing through an alt-lender could be beneficial to a borrower for closing on their pre-sale, for reselling the home if need be and for making use of their home equity.
Self-employed individuals, and people that work in the gig economy, could also benefit from alt-lending because it can be a challenge to verify their income when borrowing from traditional bank lenders.
With quick closing windows in a competitive housing market, it can become an issue for self-employed individuals to close on their desired property when borrowing from traditional bank lenders because the documentation process can be tedious.
With the steady rise of inflation, mortgage interest rates and overnight lending rates, many Canadians are looking for alternative mortgage and lending solutions.
When you work with a Mortgage Broker who has the market knowledge, connections and experience, you can rest assured that you’ll know all of your options so that you can make informed financial decisions for your future.
Though it’s a difficult time for many people in Niagara looking to buy their first home, there are strategies that can be implemented to simplify your mortgage process. As always, I’m here to help and just a simple phone call away.