Mortgages seem to have been in the news a lot in the last few weeks. The federal government came in and made some more changes to the mortgage rules. The reason for these changes is basically this – they guarantee, through their backing of the mortgage default insurers, that in the case of default the mortgage lenders have 100% assurance they will not lose any money. That’s why the government keep a very close eye on the housing industry. Taxpayers will have to cover the losses should they occur.
The last round of changes saw the implementation of a stress test. Borrowers have to qualify at a higher rate than the one they are actually getting to ensure they can afford their mortgage payments when the rates go up. It looks like there will be additional changes coming soon but we will have to wait and see what those entail. Thankfully for the government we Canadians are a good bet on the whole and arrears rates are still very low. Approx. 1/10th of those in the U.S.
So they keep referring to mortgage lenders which seems to me to leave some room for clarification. Given how rarely we go through the mortgage process and how quickly things seem to change, a quick recap of the types of mortgage lenders in Canada seems to be in order and the pros and cons of each.
Banks – this one is pretty clear. We have the ‘Big 5’ in Canada who have branches on every corner. In addition to them you have the Credit Unions and the Treasury branches. There are also a few lesser known banks who do not have as many branches but operate and are regulated in exactly the same way.
Pro – you have the ability to walk into the branch and have all of your borrowing neatly in one place. There is a peace of mind knowing that you are dealing with a company you drive by.
Con – banks historically have higher penalties if you break the mortgage. Their porting policies can be cumbersome and most use what is called a collateral mortgage. This can make it easier to borrow additional funds down the road but it also allows other borrowing to be tied to your mortgage which can make it hard to move your mortgage later on.
Monoline lenders – this is the term used for mortgage lenders who operate through mortgage brokers as compared to having branches and attempting to market to you directly. It is easiest to compare it to an insurance broker. The insurance companies market to the insurance broker who then chooses the best one for you. It is just like this. They market directly to mortgage brokers who can offer these companies to you as a consumer. Saves the lenders a huge amount of advertising costs really.
Pro – payout penalties are usually lower and you are less likely to get put into a collateral mortgage.
Con – there is no branch for you to go to. Your dealings with you lender is limited to phone, email and online portals.
Alternative lenders – this is the term for a mortgage lender who will consider you when you can not quite meet the qualification guidelines of the banks or the monoline lenders. An example of who may be looking at this type of a lender would be someone who is self employed but chooses not to pay themselves a large income in order to avoid taxes. These lenders can be banks, divisions of banks or companies who have found a lending niche for an underserved group of borrowers.
Pro – mortgage approvals for people who do not qualify through the mainstream channels. These lenders do not go through the mortgage insurers so you can avoid the mortgage default insurer premiums.
Con – often these lenders have higher rates and in some cases a lender fee which you will see either added onto your mortgage or you will pay out of pocket.
Private lenders – I use this term to encompass a group of lenders who will lend to those people who cannot meet the guidelines of any of the above. No established credit, no verifiable income, damaged credit, previously bankrupt with no re-established credit, tax arrears or even those about to go into foreclosure are people who may consider these lenders. Once a foreclosure shows on your credit bureau it is almost impossible to get a mortgage in which case choosing one of these lenders ahead of time can be in your best interest.
Pro – they will lend to many people who will not be considered by the other groups allowing them to keep their homes, free up funds to restructure debts or become home owners years before the would otherwise be able to.
Con – these lenders charge higher interest rates and generally a fee. You also need to have a sizeable amount of equity and be located in a major centre to be considered by these lenders.
So there you have a brief summary of the types of mortgage lenders in Canada. They all have an important role to play and enable many Canadians to achieve and retain their status as homeowners. And hey, let’s face it, we are Canadians. We are historically a group who sees the benefit in owning our own homes so isn’t it great that we have so many lenders to help both us and our neighbours?
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.