Securing a lender is one of the most important aspects of homeseeking. But there are countless lenders out there. Where do you start? We break down who’s who and what’s what so that when whatever happens happens, you have your ducks in a row.
There are three different types of lenders available to homeseekers: A Lenders, B Lenders and Private Lenders. It seems that they exist in a pecking order, but actually there is no difference in quality between the first two options (we’ll get to the third one later).
The big banks are referred to as A Lenders, which makes them sound superior. The categorization, however, has nothing to do with the quality of the lender but rather the profile of the client. The different types of lenders exist in order to cater to the differing risk-profiles of borrowers. So let’s take a gander at what’s on offer.
A Lenders are traditional mortgage lenders who cater to clients who have a good credit score, stable income stream and are able to service their debt. These A Lenders are either chartered banks that are federally regulated or credit unions that are provincially regulated. Because they are subject to federal regulation, their prospective borrowers are stress tested when applying for a mortgage. This stress test involves finding out if you'll still be able to pay
your mortgage should interest rates rise.
Monoline lenders form part of the A Lender bracket. Monoline lenders focus strictly on residential mortgage clients and they don’t offer any other streams of credit such as chequing or savings accounts, personal insurance, investments, or credit cards.They are heavily regulated, just like the rest of the mortgage industry, with the same client protections in place as the major banks. They often don’t have storefronts and generally only deal directly with mortgage brokers. Their simple business model means low overheads and they pass these savings onto their clients by offering better interest rates and more flexible products.
B Lenders are quasi-regulated lenders who are not directly federally regulated but indirectly follow regulations due to the nature of their business. Gee that’s a sentence and a half. Quasi = in part, or semi, or sort of. Nature of business = they’re going to lend you lots of money so they want to make sure it’s safe.
B Lenders offer a lower barrier of entry for their products which they offset with higher interest rates. Basically they cater to people who may not be eligible for a mortgage from an A Lender because they lack either strong credit history or a guaranteed income (for example, recent immigrants, the self-employed). They are able to do this because their loan terms mostly include higher interest rates, and higher down-payment requirements - normally a minimum of 20%.
They are still financial institutions though, and so they mostly use the stress test, but the lenders in this space (banks, trust companies and the like) generally allow for a more creative view of income and cash flow. These lenders tend to be quite location driven. They will lend more in high population areas and less as the population decreases. If an area is too rural they will often not consider the application.
Unregulated or Private Lenders
If your applications to A and B Lenders are met with crickets, there are still private lenders to choose from. Most private mortgages in Canada are offered by Mortgage Investment Corporations. These companies take investment money from individuals and pool it, using it to grant loans. The investors then receive a monthly or quarterly dividend.
MIC rates are often higher and come with extra fees (and no regulation), but they can bail people out of sticky situations and offer hope when all else fails. Private lenders mostly offer short term loans - the majority have 1-year terms - with the goal of graduating back to an A or B lender after the loan is written off. These loans can help people through hard times, such as foreclosures, catching up on CRA taxes, cover unexpected costs or pay for a
If based in a rural locale and you do not qualify for an A lender then you might need to go straight to a private lender as the B Lender space is focused primarily on high populated areas.
We asked Cole Hennig, REW’s National Sales Director, for his take on all of this.
Understanding the types of lenders is a good starting point when setting off on your homeseeking adventure. It’s a jungle out there and you want to make sure you’re not barking up the wrong tree or bludgeoning a dead dodo. So follow Cole’s advice and get in touch with one our REW Money Advisors. They are pros at blazing a trail for you in this amazing and confounding quest for a new home.