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Everything You Need To Know About Monoline Lenders

These mortgage-only credit companies offer lower rates and better terms than big banks

Monoline lenders via Mortgages.ca

Monoline lenders only offer their services through licensed brokers

By Scott Nazareth
Mortgages.ca

At mortgages.ca, we work with a variety of types of lenders, including banks, credit unions, trust companies and monoline lenders.

Never heard of monoline lenders? That’s no surprise. Also sometimes known as non-bank lenders, they work exclusively through mortgage brokers and don’t typically market themselves to consumers, so their names may seem unfamiliar at first.

What is a monoline lender, exactly?

These lenders only deal in mortgages. They don’t offer other services or types of credit. Nor do they maintain physical branches, instead offering service online or by phone.

What’s so great about them?

Because they have low overheads and streamlined business models, monoline lenders can usually offer lower rates than the big banks. That’s why mortgage brokers like them, and you should, too.

One other major factor that sets monoline lenders apart from big banks is their penalty structure on fixed rate mortgages. Monolines use a different formula than banks to calculate exit penalties.

So if you end up breaking your mortgage, the penalty on a monoline mortgage can be thousands of dollars less than that of a mortgage with a bank.

You may not plan to break your mortgage, but unexpected life events can get in the way of plans. According to this Globe and Mail article, about 70 per cent of borrowers must make changes to their five-year fixed rate mortgages before maturity because rates have dropped, or they’re moving to a bigger house, or their financial situation has changed.

Have I heard of these companies?

Probably not. That’s because they market themselves to brokers, rather than consumers.

Perhaps you’ve heard of First National, Canada’s largest monoline, and MCAP, the second largest. But you’ve probably not heard of RMG, CMLS, or some of the smaller lenders we work with.

Still, that doesn’t mean they aren’t reputable. Many have been around for decades, and a bit of internet research will reveal their legitimacy.

Secure monoline lenders via Mortgages.ca

A bit of internet research will reveal that monoline lenders are strictly regulated, just like the big banks.

Are they secure?

Yes. Just like the big banks, monoline lenders are strictly regulated. In fact, they’re required to follow the same lending guidelines as the majors.

They’re not in the business of giving loans to high-risk borrowers. In fact, all monoline lenders secure their mortgages with insurance from one of Canada’s three mortgage insurers.

That low-risk business model means there’s little risk to the borrower if a monoline lender were to cease operation. As when Scotiabank took over ING Direct in 2012, another lender could simply take over the purchased company’s insured mortgages. There would be no impact on borrowers.

Is it right for me?

Some borrowers prefer to work with big banks and trust companies because they’re familiar with a company’s name and reputation. That’s understandable.

But if you’re interested in finding the best mortgage for your needs, you’ll need to open your mind to borrowing from a lesser-known lender. This may require a bit of research, as well as independent advice from a mortgage broker, who can help you understand how each product’s terms may affect you.

You’ll need to read the fine print on penalty calculations, portability, refinance limitations and more. The strings attached to some monoline mortgages can be onerous, but that’s true with loans from banks, credit unions and trust companies as well.

Want to learn more?

The mortgage landscape can be confusing. As independent mortgage brokers, it’s our job to educate you about the many options offered by the many lenders in Canada. We work with home buyers and major lenders to find our clients perfectly matched mortgage products.

Ready to get started? Go to our online application form.

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Despite an interest rate hike, variable mortgages are still a smart investment

This morning, July 11, 2018, the Bank of Canada increased its overnight rate by 0.25 per cent to 1.5 per cent. It was the first rate hike in six months, but bank’s fourth increase over the past 12 months.

The overnight rate — what major financial institutions charge each other for a one-night loan — is a trendsetter. It leads financial institutions to raise prime rates, which means Canadians will be paying higher borrowing costs on such products as variable-rate mortgages.

For mortgage shoppers, there is absolutely nothing to fear in this news. With a new prime rate of 3.7 per cent, we are still highly recommending variable mortgages to our clients.

We’re saying: Do not lock in, and do not take a fixed rate. Here’s why:

The average spread between a five-year fixed mortgage and a five-year variable mortgage is now around 1 per cent.

So the prime rate would have to go up by 0.25 per cent eight or nine times more for you to be paying more interest on your variable-rate mortgage over a five-year term, when compared to a five-year fixed-rate mortgage.

The rule of thumb is: If the spread between a five-year fixed and a five-year variable is 0.5 per cent or more, go variable.

Consider the penalties

It’s important to note that the penalty on a five-year fixed mortgage is, on average, about nine times greater than that of a variable mortgage.

The average bank penalty to break a five-year fixed is approximately 4.5 per cent of your outstanding balance. So, for example, on a $400,000 mortgage, that would be a penalty of $18,000.

Compare that to the $2000 penalty on a variable-rate mortgage. It’s a massive difference.

Pay down your principal

We recommend our clients take a variable mortgage, but that they make payments as if they went fixed. So an additional $300 or 400 a month goes towards paying off the mortgage principal and not to the bank in interest.

We help clients build a plan so they can save thousands and pay off their mortgages faster. And in our view, it’s still a no-brainer to go variable.

Banks will always recommend locking in. In times like these, they’ll encourage clients to take a fixed rate product. But did you ever wonder why?

It’s because fixed rate mortgages are very profitable for the banks. The five-year fixed product is one of the most profitable mortgage products ever sold. And with massive penalties, it locks the client in.

Since about 60 per cent of clients break their mortgages, it almost never makes sense to go fixed. None of them plan to break their mortgages. But it happens. And we don’t like to see our clients slapped with big penalties when they’re facing unexpected life changes, so we advise against fixed-rate mortgages.

Back when we had five-year fixed rates at around 2.59 per cent or lower, there was a good argument for locking in. But those days are now gone.

Speaking with an experienced mortgage broker can help you define and realize your financial goals amidst a changing economic landscape. Call or email me any time with questions you or your clients might have about mortgages.

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