With the rise in interest rates this year it has become more difficult to qualify for a mortgage as the stress test rates for mortgages are now over 7%. Given this we have seen an increase in clients using B lenders to qualify for mortgages. There are a few differences between A lenders (banks and credit unions) and B lenders and we have outlined them here for you.
First of all, most A lenders will limit your debt ratio to 44% of your income. This means you can generally borrow up to 44% of your income towards all of your debt payments including your mortgage. In general B lenders will allow this ratio to higher with most of them being around the 50% mark.
B lenders will also use more income than an A lender will especially if you are self employed. In general, most A lenders will use a 2 year average of what you declare as net income on your tax return. This generally doesn’t accurately reflect your income if you are self employed. On the B side lenders can also consider income from the corporation (if applicable) or deposits to your bank account. This gives you more flexibility in terms of what you can use for income without having to declare more income and saving yourself income taxes.
The above two major benefits often mean you can borrow substantially more with a B lender than an A lender. The downside of course is that rates are slightly higher. Usually rates for B lenders range from .5% to 1% higher than most A lenders. In addition, they charge an up front fee in most cases of 1.5% of the mortgage amount which gets deducted from the mortgage proceeds.
In almost all cases the higher rate/fees they charge is usually much lower than the income taxes that would be paid if you need to declare more income to qualify for an A rate mortgage. As such, we will usually work this out for all of our clients to determine whether it is better to declare more income/get a better A mortgage rate/pay more income taxes versus keeping your income lower/getting a B rate mortgage/paying less income taxes.
If you need more information regarding mortgages or if you need any advice on your personal situation please contact our office at 604-556-3893 or email at firstname.lastname@example.org.
For more information on our mortgage products and your preferred Abbotsford Mortgage Broker please visit our website at www.ymscanada.ca.