How to Choose a Mortgage Lender in Canada?
When looking to purchase a home in Canada, make sure to explore various mortgage options. Compare interest rates offered by different mortgage lenders in Canada, including banks, credit unions, and mortgage investment corporations. This will help you find the best deal for your new home.
Securing a mortgage is a significant step in the journey of buying a home. However, the task of selecting the right lender can be challenging. Here’s essential information to consider before deciding on a mortgage lender in Canada.
What is a mortgage lender?
A mortgage lender is a financial institution or entity that offers financing for acquiring real estate. To qualify for the loan, borrowers must meet specific guidelines set by the mortgage lender. Upon approval, the lender establishes the loan terms, encompassing a repayment schedule, interest rate, and other relevant details.
Types of mortgage lenders: A lenders vs B lenders
Various institutions provide conventional mortgage loans, and these lenders fall into two categories, distinguished by the criteria and requirements that borrowers must meet to be eligible for a mortgage.
A Lenders
‘A Lenders’ refer to the prominent financial institutions that typically come to mind when considering a mortgage. These include major banks and credit unions that are well-known to most Canadians, such as the National Bank of Canada, Scotiabank, BMO, and RBC.
Securing approval from an A lender necessitates a robust credit score and a positive credit history. Furthermore, due to federal regulations governing major banks acting as A lenders, you must undergo a mortgage stress test for qualification.
While credit unions are often regulated at the provincial level, they typically adhere to stress test guidelines. Successfully passing the stress test or meeting the criteria as a creditworthy borrower increases the likelihood of approval from an A lender.
Opting for an A lender offers numerous benefits, with the primary advantage being that borrowers considered creditworthy can access the most favourable rates. Nevertheless, meeting the qualification criteria can pose a challenge, putting some borrowers at a disadvantage.
B Lenders
A B lender, sometimes called an Alt-A lender, provides mortgage solutions for borrowers who may not meet the stringent criteria set by an A lender.
B mortgage lenders comprise various smaller Canadian banks and mortgage investment corporations, including entities such as Canadian Western Trust, Home Trust and Home Equity Bank.
Opting for a B lender offers the advantage of less stringent qualification criteria compared to A lenders. B lenders are more inclined to provide mortgages to individuals with a less-than-ideal credit history or those without a guaranteed income, such as self-employed individuals or new Canadians.
Due to the increased risk assumed by B lenders, borrowers typically incur a higher interest rate.
What to check when shopping for a mortgage lender
Selecting a mortgage lender requires thorough research and careful consideration. As obtaining a mortgage is likely the most significant loan in your life, ensuring your comfort and confidence in the terms and agreement is crucial.
Consider the following factors and pose these questions when comparing mortgage lenders:
- What is the interest rate? Naturally, you aim for the most favourable and lowest rate available.
- What are the consequences if you are unable to make a mortgage payment?
- What is the method used to calculate your mortgage??
- Does the mortgage include a prepayment privilege, and if so, what are the penalties for prepayment?
- What are the associated costs for exiting your mortgage, if necessary?
- What is the amount of the monthly payments?
Feel free to ask numerous questions. Ensure a comprehensive understanding of the terms before signing the contract, and take the time to scrutinize the fine print. Keep in mind that mortgage regulations vary across provinces, so familiarize yourself with the rules in your province. Be aware of the legal aspects, especially when dealing with alternative lenders.
Alternatives
If traditional lenders like banks or credit unions decline your application, the alternative option of a private mortgage lender is still available.
A private lender, often referred to as an ‘angel investor,’ is typically an individual or institution with a high net worth specializing in private lending. These lenders view providing mortgages to those with bad credit as investment opportunities and are generally less strict than traditional lenders. This makes them a viable option for individuals with poor credit or limited credit history.
Securing a private loan can be a fast and straightforward process, yet it involves higher interest rates and carries more risk.
Frequently asked questions about how to choose a mortgage lender
What happens to a mortgage when the lender passes away?
Usually, when the lender passes away, the mortgage is settled from the estate. In Canada, the mortgage is tied to the home, not the individual. The debt doesn’t vanish; it must be repaid.
Is it possible to switch mortgage lenders?
Certainly. Mortgage contracts are entered into for a defined period known as a ‘term.’ These terms can range from a few months to over five years, depending on the terms of your agreement.
Upon the expiration of your contract, it’s necessary to renew your mortgage if it hasn’t been fully paid off (as most people require multiple terms to settle their mortgage). You have the option to stick with the original lender or explore other options and switch lenders if you come across a more favourable deal.
Should you decide to switch lenders, you’ll need approval, and it’s possible that the new lender may have distinct qualifying criteria compared to the original one.