Types of Mortgage Lenders in Canada

General Pam Pikkert 24 Oct

Types of Mortgage Lenders

 

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 US.

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 neighbors?

More Mortgage Rule Changes

General Pam Pikkert 3 Oct

More Mortgage Rule Changes!

                Over the past few years we have seen a large number of mortgage rule changes. 

  • Maximum amortizations decreased from 40 to 25 years
  • Terms less than 5 years required a borrower to qualify at a higher interest rate
  • Refinances capped at 80% of a property’s value
  • Income for self-employed individuals had to be more verifiable
  • Increased down payment for homes over $500,000

And the list can go on and on.  We have heard rumors since March of this year that another round of rule changes were coming through but we were not 100% on exactly what they would entail. 

The hot real estate markets and ever escalating prices in Vancouver and Toronto have been a great concern to the government.  Couple that with the lousy economy in Alberta and arrears rates which are rising and the federal government has deemed it prudent to add additional mortgage lending rules.

Why are they even worried about it you may ask? The reason is simple, they are heavily invested in our real estate market.  CMHC stands for the Canadian Housing and Mortgage Corporation which is owned by the federal government.   They are issuing insurance policies that they are potentially going to have to cover losses on from tax payer’s money if/when people stop paying. 

Say your neighbor bought their house with 5% down and has lost their job and can no longer make the payments so the bank steps in and forecloses.  CMHC, and the other mortgage insurers, have guaranteed that they will step in and cover any monetary losses incurred by the bank.  This means that the government and therefore all of us are literally heavily invested in the real estate market and at risk if it crashes.

On Monday October the 3rd the Ministry of Finance announced 3 more things.

  1. 1.       Mortgage Stress Test

As of October 17th, 2016 all insured mortgages, regardless of term or type, will be required to qualify at the bank of Canada posted rate.

 To put that in perspective.

Family Income $80,000

Monthly Debts      $500

Property Taxes   $3,500

25 year term

(Qualification rate today is 2.39% and after will be 4.64%)

Today that family can buy a home worth approx. $393,000 but after the 17th that drops to $310,000.  That is a large decrease to say the least.

The rate you pay will not change, just the interest rate we have to use to qualify you for the loan.

 

Safer Lending

Mortgages with a loan to value of less than 80% were not subject to the same stringent rules as those with less than 20% equity.  As of November 30th, 2016 that will change and mortgages will all be subject to the same lending criteria.

 

  1. 2.       Closing Loopholes and Managing Tax Fairness

There is a proposed change to the tax laws on the table as well.  They want to make sure that the Capital Gains tax exemption on a primary residence is not abused by either residents or non-residents buying and selling a primary residence within the same year.   This is in all likelihood an attempt to cool Toronto and Vancouver markets.

  1. 3.       Managing Risk and Protecting Tax Payers

The final piece in the announcement is a little bit unclear as to exact ramifications.  Currently CMHC and the other mortgage insurers take on all the risk associated with mortgage default.  They are planning to implement a consultation process on a policy option where mortgage lenders would have to manage a portion of their loss.   We will have to wait and see what exactly happens from here.

 

So there you have it.  Getting a mortgage just got even harder and it doesn’t matter if you walk into your trusted branch or go through a mortgage broker.  The rules have changed for us all.

 I cannot stress enough the necessity of making sure you speak to a well-qualified mortgage professional before you make any decisions about buying or selling in case you are one of the folks affected by these changes.  I will keep you up to date on any changes which come down the road.