An Overview of Subprime Mortgages in Canada | Turkin Mortgage (2024)

FAQs

Yes. Although there has been a stigma around subprime mortgages since the 2007/2008 subprime mortgage crisis (housing bubble) in the U.S., subprime mortgages are still popular, with 12% of all mortgages in the country being subprime.

The major drawback of subprime mortgages is their higher interest rates compared to prime mortgages. The higher interest rates are because lenders have to take greater risks with borrowers who are less creditworthy. Subprime mortgages also have a longer amortization period (40-year amortization period is not uncommon), and the upfront costs are usually higher.

Subprime loans allow Canadians who would otherwise not get loans from prime lenders to fulfill their dreams of home ownership. These mortgages also help improve the borrower’s credit score. The cons of subprime mortgages are the higher interest rates, the more expensive upfront cost, and the longer amortization period.

Subprime mortgage interest rates vary from one lender to the other and from one borrower to the other. You expect to pay between 6.99% and 11.99% today, but this rate may go higher if your financial situation is very bad. There is a cap beyond which lenders cannot charge you.

Subprime mortgage buyers are Canadians who have poor credit scores (typically below 680), individuals who are self-employed and cannot provide proof of income, and those with unconventional incomes, such as those earning freelance and commission incomes. Others are individuals with high debt-to-income (DTI) ratio, new Canadians who are yet to work on their credit score, individuals with low incomes, and individuals who are buying unconventional homes such as boathouses, mobile homes, and tiny homes. If you have had a consumer proposal, a debt management plan, a bankruptcy, a foreclosure, a judgment, or a repossession, a subprime mortgage allows you to get a loan without waiting for the 2-year waiting period.

Yes. A subprime mortgage is a mortgage just like any other. You will still need to provide a down payment, and you will still need to prove to the lender that you are able to meet your repayment obligations.

Yes. Subprime mortgages play an important part in the Canadian economy as they help people who would otherwise never own homes to do so. The industry is heavily regulated to reduce the risk of a foreclosure crisis, as experienced in the U.S. in 2008. There are also interest rate caps put in place to ensure lenders are not predatory.

If you do not qualify for a prime mortgage, a subprime mortgage is your best bet. As you service your mortgage, your credit score will improve, and you can then transfer your mortgage to a prime lender for better terms.

Considering that these loans are reserved for individuals with poor credit scores and who have other financial problems, such as a history of bankruptcy and non-conventional incomes, these loans are riskier. Lenders protect themselves by charging higher interest rates. It is important to note that the Canadian subprime mortgage market was not hit even in 2008 due to the strong regulatory environment. The regulator continues to have stringent controls to date.

The term “subprime” indicates that the borrower is less creditworthy and therefore is at a higher risk of defaulting on a mortgage. The major basis for this is the borrower’s credit score.

The Canada Mortgage and Housing Corporation (CMHC) puts the minimum credit score requirement at 680 – anything below this is considered subprime. Visit Equifax or TransUnion to confirm your current score.

To qualify for a subprime mortgage, you will need to verify your identity, provide proof of income, and provide basic financial information such as bank letters. You will need to pay a down payment, provide details of the property you want to buy, and pay closing costs.

Just like with prime mortgages, most borrowers either go for fixed mortgages or adjustable-rate mortgages (ARM). Fixed mortgages are usually longer, going up to 40 years, while ARMs usually go up to 30 years. There are also interest-only mortgages, where you first pay off the interest before you can start paying the principal.