Home ownership is a worthy goal for most Canadians. Today, with rising home prices and tightening mortgage rules, Canadian home buyers often struggle to meet the traditional mortgage borrowing requirements. For many, it may be worth exploring various alternative strategies to finance a home purchase.
The Canadian housing market remains active despite producing lower numbers than a couple of years ago. Interest rates may come down a bit and the long-term trend for house prices might continue to be positive. Home ownership should be beneficial over time both personally and financially. If you can’t qualify under the stringent A-lending criteria at the major mortgage lenders, what can you do to enter the market? Let’s review the strategies we see some Canadians using today.
Qualifying for a Mortgage Today
Before diving into alternative strategies, let’s look at the primary method of financing a home purchase: securing a mortgage. The key factors that lenders consider when evaluating you as a borrower include:
Credit Score: Borrowers often overlook a good credit score, but it is crucial. A-lenders typically look for scores above 680. Borrowers with lower credit scores can often secure a mortgage but at higher rates.
Down Payment: The minimum down payment for an insured mortgage is 5% for homes worth up to $500,000, and 10% for the portion of the home price between $500,000 and $1 million. These down payments apply for insured mortgages. If your down payment is greater than 20% you do not require mortgage insurance. Homes worth over $1 million are not eligible for mortgage insurance and require a minimum down payment of 20%.
Income and Employment: Stable and provable income is necessary to qualify for the lowest mortgage rates. Lenders will use your income to calculate your debt-service ratios to ensure you can manage the required mortgage payments over time.
Mortgage Stress Test: Mortgage borrowers must pass the mortgage stress test. This stress test is part of the debt-service calculation. The mortgage rate used by lenders today under the stress test is your contract mortgage rate plus 2%.
One area of traditional lending that has also seen some change in recent years is family members providing assistance. New home buyers often receive either i) down payment funds from parents, or ii) a close relative acting as a co-signor. Either of these strategies can greatly enhance a new homebuyer’s chances of qualifying for a mortgage.
Traditional Mortgage Strategies
Fixed-Rate Mortgages: These are the most common mortgages in Canada. They offer a stable interest rate during the term of the mortgage and predictable monthly payments for the term of the mortgage. They are the conservative choice for most mortgage borrowers.
Variable-Rate Mortgages: These are less common than fixed rate mortgages but become more popular when borrowers believe that interest rates will decline in the future. Variable mortgage rates fluctuate with the market, which can lead to lower rates during the term of the mortgage. The trade-off is that they create interest rate risk for a borrower than can be costly if rates move against you.
High-Ratio, Insured Mortgages: Mortgage insurance helps borrowers that have smaller down payments. If your down payment is less than 20% and the property value is less than $1 million, then you require mortgage insurance through CMHC, Sagen, or Canada Guaranty. When your mortgage is more than 80% of the property value (i.e. your down payment is less than 20%) it is considered a ‘high-ratio’ mortgage. Insured mortgages can have either fixed or variable rates.
These traditional mortgage financing methods have worked well over time in Canada. The housing and mortgage markets in Canada are generally strong and have historically compared favourably to other jurisdictions. In recent years Canadian house prices have increased dramatically and the current higher interest rate environment puts stress on prospective borrowers attempting to qualify for mortgage financing.
A recent survey from CMHC, 2024 Mortgage Consumer Survey, shows that Canadian homebuyers are resilient in the face of these challenges. CMHC says in their report that “While consumers continue to have concerns or uncertainty during the home buying process, the majority (79%) still believe it is a good long-term financial investment.”
Adapting to the higher interest rate environment presents challenges but homebuyers continue to adjust. Many have turned to non-traditional home financing methods. This demonstrates the market’s adaptability and Canadian’s persistence in pursuing the homeownership dream.
Alternative Mortgage Financing Strategies
With the housing market becoming more challenging, many Canadians are turning to alternative strategies to make home ownership possible. The most common strategies include:
Private Lenders
When traditional A- or B-lenders aren’t an option, private lenders can work for some borrowers. You should always try to qualify for an A-mortgage or a B-mortgage first. A private mortgage should be a last resort for borrowing on your own. The reason for this is that private mortgages are more expensive, often far more expensive than the other alternatives. Private lenders often provide more flexible terms but that comes at a cost.
