Can You Get a Mortgage with Bad Credit in Canada

Yes, you can get a mortgage in Canada with bad credit, but typically not through major banks. Working with a mortgage broker gives you access to alternative lenders, often called "B lenders," or options like home equity loans. These lenders specialize in serving individuals with less-than-perfect credit, albeit at higher interest rates and stricter terms.

Understanding Mortgages for Bad Credit Borrowers in Canada

What Is Considered Bad Credit in Canada?

In Canada, credit scores range from 300 to 900. A score below 650 is generally considered poor. Credit scores impact your ability to secure financing and the terms you’re offered. While major banks ("A lenders") usually require a score of 680 or higher for a mortgage, alternative lenders are more flexible, focusing on other factors like income, assets, down payment size (for purchases), or available equity (for refinances).

Why Do Banks Reject Bad Credit Applications?

With a lower credit score, lenders perceive you as a higher risk for default, resulting in either outright rejection or higher pricing. However, many alternative lenders specialize in accommodating borrowers with credit issues and overextended income due to debt. A knowledgeable broker can provide you with the right guidance going forward.

How Mortgage Brokers Help Bad Credit Borrowers

Mortgage brokers act as intermediaries between borrowers and lenders. They have relationships with a variety of lenders, including:

Non-prime / Alternative / B Lenders: Private or non-bank institutions offering mortgages to those with lower credit scores. These loans typically come with higher interest rates.

Non-institutional / Private Lenders: Private companies willing to assess mortgage applications based on equity with less focus on credit scores.

For example, if you have a credit score of 550 but a 25% down payment, a B lender might approve you for a mortgage at an interest rate of 6%, compared to 4% offered to a borrower with good credit.

Example of Mortgage Costs for Bad Credit Borrowers

Let’s assume you’re refinancing a $350,000 mortgage on a home worth $800,000. A borrower with good credit might secure the full amount for a 5-year term at a fixed mortgage rate of 4.89%, while someone with bad credit might get less than the full amount with a rate of 6%.

Monthly Payment for a Borrower with Good Credit:

Mortgage Details: $350,000 at 4.89%

Monthly Payment (25-year amortization): $2,013.76

Monthly Payment for a Borrower with Bad Credit:

Mortgage Details: $350,000 at 6%

Monthly Payment (25-year amortization): $2,237.24

Pros and Cons of Alternative or B Lenders

Pros of B Lenders:

Flexible Approval Criteria: Focus on your income and equity rather than solely your credit score.

Quicker Approvals: Streamlined processes compared to traditional banks.

Path to Rebuilding Credit: Successfully managing these loans can improve your credit score over time.

Cons of B Lenders

Higher Interest Rates: Rates can be slightly higher than prime mortgages.

Closing Costs: Fees for brokers or lender-specific charges can add to the closing costs.

Stricter Terms: May require larger down payments or co-signers.

What Credit Score do You Need to Get a Mortgage in Canada?

Ideally, a credit score of 680 or higher is needed to qualify for prime mortgage lenders. With lower scores, you may still get a mortgage through alternative lenders, but expect higher interest rates and reduced borrowing amounts. A higher score gives you access to better terms and the lowest rates. You might need to get a private mortgage if you cannot qualify with B lenders.

What Credit Score do You Need for Mortgage Refinancing in Canada?

For mortgage refinancing with traditional lenders, a credit score of 680+ is recommended. If your score is below this, you might need to work with mortgage brokers with access to alternative lenders who offer refinancing options but at higher rates and fees.

How to Get a Mortgage with Bad Credit in Canada?

Work with a mortgage broker for guidance and get access alternative or private lenders.

For purchases, provide a larger down payment (20% or more is ideal).

Demonstrate stable income and employment.

Offer additional collateral or use a co-signer to strengthen your application.

Can You Get a Home Equity Loan with Bad Credit?

Yes, home equity loans can be a smart financial tool for bad credit borrowers, especially for debt consolidation. Most homeowners will pay off their debt with a home equity loan, improve their cash flow (most of our clients pay 50% less interest), and rebuild their credit score before refinancing with a traditional lender.

Can You Get a Home Equity Line of Credit (HELOC) with Bad Credit?

Yes, getting a HELOC with bad credit is possible but challenging as major banks often require a credit score of 680+. However, there are alternative lenders and private lenders that offer bad credit HELOCs with higher pricing.

Which Banks Offer Bad Credit Mortgages in Canada?

Bad credit mortgages are typically offered by alternative lenders, such as Home Trust, Haventree Bank, Community Trust, etc. Homeowners can access these alternative B lenders through a mortgage broker.

What Are the Interest Rates for Bad Credit Mortgages in Canada?

Bad credit mortgages rates depends if the mortgage is a first or second mortgage. First-position mortgages might have rates between 6-7%, while second-position bad credit mortgages could range from 8-14%. Loan-to-value ratio is a big determining factor for interest rates if the borrowers have credit issues.

Can You Get a Mortgage After Bankruptcy in Canada?

Yes, you can get a mortgage after bankruptcy, but it’s typically through alternative lenders. Rebuilding your credit score and having a strong financial profile (e.g., steady income, significant down payment) will improve your chances of approval.

Co-Signers Can Help Improve Your Chances

A co-signer with good credit strengthens your mortgage application but can complicate the process depending on their income and debt. Their financial profile reassures lenders, increasing the likelihood of approval and potentially reducing interest rates.

What Are the Risks Associated with Bad Credit Mortgages?

Higher Costs: Elevated interest rates and fees can strain your budget.

Default Risk: Missing payments can further damage your credit.

Limited Flexibility: Stricter terms can make refinancing or early repayment challenging.

How to Improve Your Credit Score to Qualify for a Mortgage

1. Pay bills on time to build a positive payment history.
2. Reduce credit card balances to below 30% of the credit limit.
3. Avoid applying for new credit unnecessarily.
4. Monitor your credit report for errors and dispute inaccuracies.

Getting a Mortgage in Canada with Bad Credit

Getting a mortgage in Canada with bad credit is possible, especially with the help of a mortgage broker and alternative lenders. While costs may be higher, this can serve as a stepping stone toward improving your financial situation and eventually qualifying for better loan terms. You can also choose to improve your credit score prior to getting a mortgage. By understanding your options and taking proactive steps to rebuild your credit, homeownership remains within reach.