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Monday, August 29th, 2016

Subprime Mortgage Renewal Risk

Subprime mortgages are meant to be short-term financing solutions for borrowers who have hit a rough patch.

When you get a subprime (aka,“B”) mortgage, the idea is to choose a term that’s just long enough to rehabilitate your credit (or fix the problem that makes you a high risk borrower). Thereafter, you can refinance into a prime mortgage with a better rate and features.

People who don’t improve their credit while in a subprime mortgage put themselves at risk. If they have to renew, they could be forced to do so with their existing lender at unfavourable terms.

Worse yet:

  • Their lender might decide not to approve the renewal, or
  • Their lender might cease to exist altogether.

In either case, high-risk borrowers with few resources (especially those with loan-to-values over 80%) could be stranded with no lender options. That can mean foreclosure if they can’t sell their house in time.

There’s a lengthy list of subprime lenders who have departed the Canadian market. It includes names like:

  • Abode Mortgage (Abode was also a prime lender)
  • Accredited
  • Citi Financial
  • GE Money
  • GMAC (GMAC was also a prime lender)
  • Moneyconnect
  • N-Brook
  • Noble Mortgage
  • Wells Fargo

There have also been several existing lenders who closed their subprime divisions in the last four years, including:

  • First National
  • MCAP (It has since brought back non-prime lending.)
  • MyNext Mortgage (now Radius Financial)
  • ResMor Trust (now RMG Mortgages)
  • Street Capital (It has since brought back non-prime lending.)
  • Xceed

The credit crisis claimed a lot of lenders as victims. One of the latest is HSBC Finance, the subprime subsidiary of HSBC Bank Canada.

But it doesn’t take a credit crisis for a subprime lender to disappear. TD Financing Services is a good example. See: TD to Halt Non-Prime Lending

HSBC Finance

Hsbc-finance-canadaIn HSBC Finance’s case, HSBC Bank Canada spokesperson Fabrice de Dongo, says, “We are (currently) informing all clients of HSBC Financial Corporation Limited that, as part of the winding down of the business, we will renew their mortgage for a one-year term, after which they will be requested to secure financing from another financial institution.”

He says, “Our renewal policy is based on credit score and payment history. More specifically, we determine the overall risk of a customer, and therefore the renewal qualifications, based on payment history and internal and external credit scoring. Simply missing one payment over the course of the mortgage term does not disqualify a customer from renewal, but repeated non-payment is clearly in nobody’s best interest.”

De Dongo adds, “The interest rate that is charged is entirely dependent on a customer’s credit profile, and at renewal this rate may be greater or lesser than the previous one.”

The takeaway…

If you get a subprime mortgage and don’t improve your credit profile, you can face serious renewal risk. That threat is heightened when home prices fall, your debt ratio increases, your income takes a hit, or you can’t prove all of your income.

Any good mortgage planner can assist you in creating a plan to rehabilitate your credit. As a subprime borrower you need to leverage that advice, stick to their plan and become a “bankable” client as soon as you can.


Rob McLister, CMT

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