The Different Types of Lenders – Banks vs. Credit Unions vs. Monolines
Many Canadians automatically go to their local bank branch for a mortgage. This can be a huge mistake and can end up costing you big time. A bank might be a good option for some, but it’s not for many. Let’s take a look at some of the different lending options available when choosing a mortgage.
Everyone knows the banks. You can find the banks’ names everywhere, from billboards to hockey arenas. The banks offer a name that you know and trust. However, that loyalty can come at a cost.
While the banks can usually offer competitive mortgage rates, that’s not the only thing you should care about when signing up for a mortgage. Prepayments and penalties are two other things to care about.
When it comes to the banks, they tend to have among the most restrictive prepayments. Some banks only let you make extra lump sum payments once a year on your mortgage anniversary date. Be sure to ask about prepayments if that’s something that matters to you.
Penalties are also something to watch out for with the banks. The banks tend to have the most punitive mortgage penalties out there. That’s because the banks use their inflated posted rate to calculate your mortgage penalty. Stats show that 6 in 10 Canadians break their mortgage before the end of their term, so penalties are something to pay close attention to.
The banks sometimes offer you cashback when you sign up for a mortgage, but keep in mind that you could have to pay back most or all of the cashback if you break your mortgage like many Canadians.
Credit unions are usually local neighbourhood lenders. Since credit unions tend to be smaller lenders, they often do a better job tailoring to the local community’s needs.
Credit unions offer most of the same pros and cons as banks. Credit unions tend to offer competitive rates. However, I find that they have better prepayment privileges than a lot of banks. That being said, credit union penalties can be as punitive in nature as the banks, so be careful, as there are many reasons you might break your mortgage – upsizing your home, a job promotion, marriage, a new child or divorce.
Something else to be aware of. Most credit unions are provincially regulated. This means that if you move to another province, you can’t move your mortgage with you, so be careful.
Monolines or monoline lenders may not be a term you’re familiar with. These are non-bank lenders available exclusively through mortgage brokers. Monolines don’t have branches on every corner. However, because of that, their overheads costs are a lot lower. They’re able to pass those savings along to you in the form of competitive mortgage rates and better terms and conditions.
Monolines almost always have better prepayment privileges. It’s fairly typical to make lump sum payments on any of your regular mortgage payment dates throughout the year, not just once a year like some of the banks.
The penalties are also an area in that monolines have a huge advantage. Monolines tend to offer a lot fairer mortgage penalties than the big banks. Your penalties might be 3 or 4 times less at a monoline lender than at a big bank. Remember, 6 in 10 Canadians pay the penalty on average during a 5-year mortgage term, so it’s something important to pay attention to.
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