Last week we began our in-depth look at financing a home purchase. In part two, we go into the myriad of options available to a buyer when looking for a mortgage and let you know some of the best ways to get started.
Where to get a mortgage
The first stop for many people when taking out a mortgage is one of the big five banks: BMO, CIBC, RBC, Scotiabank and TD. These five lenders dominate the mortgage market in Canada, accounting for 72.6% of the market share of mortgages in 2018 according to a Teranet report. That dominance alone helps generate more business for the big five, as does the major brand recognition that they possess.
Unfortunately, there are lots of people who believe this is their only option and give up their dreams of home ownership if they are given unfavourable terms or are outright rejected by the big five. However, there are many more options that buyers can look at. Shubha Dasgupta, Founder and CEO of Pineapple, outlined some of the options available to buyers, pointing out that “Canada has an amazing variety of highly regulated and specialized mortgage lenders. It’s very important that Canadians explore all the options available as most times a great solution will present itself. “
What are these other options? Firstly, there are 82 federally-regulated banks in Canada that are not part of the big five. Some of these will be familiar names to you, such as HSBC, Laurentian Bank of Canada, Manulife Bank of Canada, President’s Choice Bank, and National Bank of Canada, which is sometimes included in a “Big Six” of Canadian banks. Others might be less familiar but they are all backed by the same federal regulations, which gives you and your finances some level of protection and security. In fact, this list may offer some additional features that you might prefer, such as banks that have no branches and do all their services either online or over the phone – passing the savings on to their customers in the process.
Moving away from the federally regulated organizations, there are still plenty of options for borrowers to choose from. The most popular options are financial institutions that specialize in mortgages (known as “monolines” in the Teranet report) and credit unions.
In 2018, monolines accounted for 2.7% of the mortgage market (by mortgage value) – a not-insignificant share. These companies live and die by the quality of their products and their trustworthiness. You will find some of them that voluntarily adhere to federal standards and the specialization may even get you a better level of service and knowledge.
Credit Unions offer a different structure altogether. As non-profit organizations, they work on behalf of their members (customers) rather than their shareholders. That is appealing to many and helps to explain why the various credit unions in Canada accounted for 6.1% of the mortgage market in 2018, behind only the big five (72.6%), other banks (7.7%), and private lenders (6.7%).
In addition to the above, there are trust companies, insurance companies and investment firms that between them took up 4.2% of the mortgage market in 2018. Many of these institutions are federally regulated – for example, there are 44 federally regulated trust companies in Canada. This means they can offer similar packages to the banks and borrowers will have the same protections.
A final note goes to private lenders – a section that accounts for 6.7% of the mortgage market and has grown notably in recent years (from 4.5% in 2018). These are mortgages that are provided by individuals, groups of individuals, or a mortgage investment corporation that pools together the funds of private equity investors. Loans from private lenders have proved popular with low credit borrowers as private lenders tend to focus on other areas when lending money, such as the value of the home. They also tend to be quicker to arrange and often don’t require proof of income – a factor which prevents many self-employed people from taking a mortgage with a big bank.
Because of the short-term nature and the risk involved for the lenders, interest rates tend to be higher for these mortgages and there are examples where they have been extremely high. Some people have used these loans as a bridge to allow them to get into the housing market, before refinancing with another lender once the property has been purchased and its value has increased. There is obviously a risk involved in this and great care should be taken by borrowers. However, there are steps you can take to mitigate potential risks, as explained by Mr. Dasgupta when we spoke with him: “Ensuring that you understand all the fees and costs associated is the first thing. Not all private lenders are created equally making it a little more difficult to ensure your protected against hidden fees and potential costs associated with the mortgage. Secondly, you’d want to know why you’re being suggested into a private lender. Speaking with a credible mortgage professional will ensure that you are protected against this.”
Where should I start?
It’s a great question. There’s a massive amount of information and it it’s almost impossible for a layman to understand all the options available to them. Fortunately, there are experts that can help. Mortgage brokers like Shubha Dasgupta and his company, Pineapple, have spent decades working with mortgages and know the industry better than most. Mr. Dasgupta, says that, “It’s important to speak with a professional when someone begins looking for a mortgage. With thousands of products available in the market, each with a specific purpose, guidelines and terms, a professional will help navigate them through this landscape safely and ensure they end up in the right product suited for their needs.”
Mr. Dasgupta also points out that working with an expert can help buyers avoid some common pitfalls when applying for financing: “If someone is working with a licensed mortgage agent or broker, the chances of a rejection are very small. Because of all the options available, they can help design a solution that meets the client’s needs. If this doesn’t work, solutions to the challenge will be offered as the second step – things like a potential co applicant, paying down debt or increasing down payment. If all the above fail them, we will work with the clients on creating a plan or strategy to prepare for the mortgage in the future.” Connecting with someone like Mr. Dasgupta and his company can save you incredible amounts of time and help ensure that you get the best deal. Similarly, experienced, knowledgeable and well-trained real estate agents like those at Living Realty have a great understanding of the real estate financing and can help you understand many of your options or connect you with other reliable and trustworthy experts.