TORONTO — For years, Samantha Brookes has urged Canadians to scrutinize the fine print in their mortgage contracts. Lately, that warning has become more urgent.
Since the Office of the Superintendent of Financial Institutions introduced the revised mortgage stress test in January, Brookes — founder of the Mortgages of Canada brokerage — has seen “a huge influx” of borrowers who no longer qualify for traditional bank mortgages. Many are turning to alternative lenders, a category that ranges from high-risk private lenders to established non-bank institutions such as Home Trust.
Alternative lenders can provide a crucial option for people who have run out of conventional financing choices. However, Brookes cautions that those solutions often carry hidden costs and restrictive terms for anyone who doesn’t carefully read the agreement.
“You need to read those contracts,” she said. “With an alternative lender, the interest rates and the qualifying rate tend to be higher than a traditional bank’s. They may also charge a lender’s fee — typically around one per cent of the mortgage amount at closing — which increases your upfront costs.”
Brookes warns borrowers to watch for restrictive clauses that can limit their future options. One she encounters occasionally is the sale-only clause: if it remains in the contract, selling the property may be the only permitted way to exit the mortgage. She makes it a priority to have such terms removed from her clients’ agreements.
She also recommends researching any potential lender’s reputation. A simple online search can reveal whether a lender is frequently involved in legal disputes with borrowers. “If they are constantly in court fighting with consumers for money, are you willing to put yourself at risk with that kind of person?” she asked.
That said, Brookes notes there are reputable alternative lenders that don’t resort to aggressive tactics and can offer reasonable terms — if you do your homework.
Broker Ron Alphonso shared a cautionary tale about what happens when borrowers fail to investigate who is arranging their mortgage. He described a couple who borrowed $100,000 through a paralegal posing as a broker. The paralegal convinced them to hand the funds back so he could invest on their behalf, but instead fled to Sri Lanka with the money. The couple was left responsible for the debt and faced eviction.
“They got very, very poor advice,” Alphonso said. “Apparently the person that arranged the mortgage was an agent and paralegal that has since been disbarred. If they had a lawyer working for them, at least the lawyer could have raised red flags before they signed.”
Alphonso advises borrowers to use a qualified broker and to ask specific questions about how tolerant a lender will be if payments are missed. Policies vary: some lenders move quickly to power-of-sale or foreclosure, while others will work out arrangements to help a borrower keep their home.
“If you are already in some kind of financial problem and you go to a lender that is not flexible, you make the situation worse,” he said. “If you miss one payment, within 15 days you could be facing power-of-sale.”
When power-of-sale or foreclosure proceedings begin, many homeowners try to fight in court and end up incurring tens of thousands in legal fees. Alphonso frequently sees cases where legal costs wipe out any remaining equity; if the homeowner loses, they are left without a house and with a large bill.
Because private or alternative mortgages often carry higher interest rates and stricter terms, Alphonso recommends borrowers plan an exit strategy before signing. “Your goal should always be to move to a lower interest rate,” he said. “If you don’t enter a private mortgage with a clear plan to get out of it, you could face serious problems down the road.”
One option he suggests is an open mortgage, which allows prepayment of any amount at any time without a compensation charge or a prepayment limit. Open mortgages typically have higher rates than closed ones, but they give borrowers the flexibility to refinance with a cheaper lender when circumstances improve — though switching can sometimes involve penalties.
Because some agents and brokers may not fully disclose penalties and restrictive clauses, the best protection is informed questioning. Ask plenty of questions about fees, prepayment rules, default policies and any unusual contract language before you sign. Understanding the full terms — and having a plan to refinance or exit if necessary — can prevent costly mistakes later.
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