What Non-Conventional Mortgage Options Are Available in Canada?

Not every borrower or home purchase fits neatly into conventional mortgage financing. You may have less than 20% down, irregular income, limited Canadian credit history, credit problems or a property that a particular lender will not finance conventionally. Those circumstances do not necessarily end the mortgage search, but they can change which financing route is available. Non-conventional mortgage options in Canada can include insured high-ratio mortgages, mortgages from alternative lenders, private mortgages and specialized programs for particular borrowers or properties. The appropriate route depends on why conventional financing does not fit, since each option solves a different problem and can have different qualification requirements and costs.

What Does Non-Conventional Mortgage Mean?

There is no single mortgage product officially called a “non-conventional mortgage.” The term is generally used to distinguish financing from a conventional mortgage, which normally has a loan-to-value ratio of 80% or less.

Understanding what a conventional mortgage is in Canada makes the distinction easier. A borrower outside that structure may still obtain financing through an insured mortgage or through lenders and products designed for circumstances that do not fit a traditional mortgage application.

The important question is therefore not simply whether a mortgage is conventional. It is why conventional financing does not work for the particular borrower or property. Someone with a 10% down payment has a very different financing problem from someone with substantial equity but income that is difficult to document.

An Insured High-Ratio Mortgage

Having less than 20% down does not automatically push a borrower toward a private or alternative lender. An insured high-ratio mortgage can provide a mainstream route to homeownership with a smaller down payment.

Mortgage loan insurance is generally required when the down payment is below 20%. For eligible CMHC-insured purchases, financing can reach up to 95% loan-to-value. The current CMHC mortgage loan insurance rules allow a minimum down payment starting at 5%, subject to the purchase price and other eligibility requirements.

For homes costing $500,000 or less, the minimum down payment is 5%. Above $500,000, the minimum is 5% on the first $500,000 and 10% on the remaining portion. CMHC mortgage loan insurance is not available when the home costs $1.5 million or more.

The insurance protects the lender rather than the borrower, and its premium is commonly passed on to the borrower. The premium can generally be paid upfront or added to the mortgage.

For borrowers whose main obstacle is the size of their down payment, the distinction between conventional and high-ratio mortgages is more relevant than immediately searching for an alternative lender.

Alternative or B-Lender Mortgages

Some borrowers have enough equity for a conventional mortgage but cannot satisfy the underwriting requirements of a particular bank or other prime lender. Alternative lenders, often called B lenders in the mortgage industry, may serve borrowers whose applications require a different approach.

This can be relevant when income is irregular or difficult to document using a lender’s standard process, when credit history creates problems with prime financing, or when some other part of the application falls outside a lender’s preferred criteria.

An alternative mortgage should not be treated as a way to bypass qualification altogether. The lender still assesses the borrower and property, but its underwriting criteria and risk tolerance may differ from those of a prime lender.

Costs also deserve close attention. Compare the interest rate, lender or broker fees where applicable, mortgage term, prepayment conditions and the cost of leaving the mortgage before the term ends. A mortgage that solves an immediate approval problem can become expensive if its full contractual cost is overlooked.

Private Mortgages

A private mortgage comes from a private individual, corporation, mortgage investment corporation or another non-bank source willing to lend against real estate.

Private financing is sometimes used when a borrower cannot qualify through conventional or alternative institutional lending. Equity in the property can carry significant weight because the property secures the loan.

That flexibility can come at a price. Private mortgages may have higher interest rates and additional fees, and terms can be relatively short. The borrower may therefore need a realistic plan for what happens when the term expires, such as qualifying with another lender, selling the property or arranging new financing.

A private mortgage can fill a financing gap, but it should not be viewed as equivalent to a conventional mortgage with easier paperwork. The cost structure and exit strategy can be materially different.

Insured Financing for Newcomers to Canada

Limited Canadian credit history does not automatically prevent a newcomer from obtaining mortgage financing.

CMHC-insured financing is available to eligible permanent residents and non-permanent residents. Non-permanent residents must be legally authorized to work in Canada, and the purchase must comply with applicable restrictions on residential property purchases by non-Canadians.

Where Canadian credit history is limited, the CMHC Newcomers program may consider an international credit report, a reference letter from a financial institution in the borrower’s country of origin or other methods of establishing creditworthiness. At least one borrower or guarantor must have a minimum credit score of 600 under the current program requirements.

This route is different from turning to a private lender simply because someone is new to Canada. A borrower who satisfies an insured program’s requirements may still be able to obtain financing through an approved institutional lender.

A Non-Traditional Down Payment May Be Possible

Some borrowers can qualify for insured financing even when part of the challenge is where their down payment comes from.

CMHC recognizes traditional down-payment sources such as savings, proceeds from selling another property and a non-repayable financial gift from a relative. Its homeowner insurance programs can also permit certain non-traditional down payments from arm’s-length sources, including unsecured personal loans or unsecured lines of credit.

This option is limited. CMHC states that non-traditional down payments are available for eligible one- or two-unit homeowner properties at 90.01% to 95% LTV and require a strong history of managing credit. Non-permanent residents are not eligible for this feature.

Borrowing the down payment also creates another debt obligation, so qualifying for the mortgage still depends on the borrower’s overall finances.

Does Choosing a Non-Conventional Mortgage Avoid the Stress Test?

Changing mortgage type does not automatically remove mortgage qualification rules.

For uninsured mortgages at federally regulated lenders, the current minimum qualifying rate is the greater of the mortgage contract rate plus 2 percentage points or 5.25%. OSFI expects federally regulated lenders to apply this test to most newly underwritten residential borrowers.

Different lenders can fall under different regulatory frameworks, so borrowers should not assume that every mortgage provider applies identical underwriting rules. More importantly, avoiding one particular qualification method does not make the underlying debt more affordable.

A borrower who cannot qualify for the desired mortgage amount should compare the payment they would actually have to carry, not merely search for a lender willing to approve a larger loan.

Which Non-Conventional Mortgage Option Fits the Problem?

Start with the reason conventional financing is unavailable.

If the issue is less than 20% down, insured high-ratio financing may be the natural first route. If the problem is limited Canadian credit history, an insured newcomer option may address it without requiring private financing.

If you have substantial equity but do not fit a prime lender’s underwriting criteria, an alternative lender may offer another route. A private mortgage is a separate option when institutional financing is unavailable or unsuitable, but its potentially higher costs and shorter term make the repayment and exit plan especially important.

Before moving outside conventional financing because you believe you cannot qualify, compare your circumstances with the requirements involved in qualifying for a conventional mortgage in Canada. A rejection from one lender does not necessarily establish that every conventional mortgage is unavailable.

Compare the Entire Mortgage, Not Just the Approval

Getting approved solves only the first problem. The mortgage still has to be manageable after closing.

Compare the contractual interest rate, fees, term, amortization, prepayment privileges, penalties and renewal or exit requirements. If mortgage loan insurance applies, include the premium when assessing the financing cost. The relationship between insurance and conventional financing is explained further in conventional vs. insured mortgages.

A non-conventional option is most useful when it addresses a specific obstacle without creating a larger financial problem later. Knowing exactly why conventional financing does not fit makes it much easier to narrow the alternatives worth considering.

Questions About Non-Conventional Mortgages in Canada

Is an insured mortgage considered non-conventional?

A mortgage above 80% loan-to-value is high-ratio rather than conventional and generally requires mortgage loan insurance. Insurance itself is a separate characteristic, however, because mortgage insurance can also exist at lower LTV ratios.

Can self-employed borrowers get non-conventional mortgages?

Self-employment does not automatically require non-conventional financing. The available route depends on whether the borrower can satisfy a lender’s income-verification and other underwriting requirements.

Are private mortgages only for borrowers with bad credit?

No. Credit problems are one reason borrowers may consider private financing, but private mortgages can also be used when other aspects of the borrower, property or transaction do not fit institutional lending requirements.

Can you move from a non-conventional mortgage to a conventional mortgage later?

Potentially. A borrower may later qualify for different financing if their equity, income, credit or other circumstances change. Approval is not automatic, so any plan to refinance or switch lenders should account for the qualification requirements that will apply at that time.