Homeowners have a lot of choices regarding where to get a mortgage in today's competitive market. Should they go with one of Canada's big five banks (CIBC, Scotiabank, TD Canada Trust, RBC and BMO) or use a smaller lender otherwise known as a non-traditional lender? Let's consider the pros and cons of each.
Big Five Banks
According to Farhaneh Haque, Director of Mortgage Advice at TD Canada Trust, a bank can help consumers see how their mortgage can fit into a full financial plan. Banks provide a "one-stop shop" for such planning.
Homeowners may also be able to get a higher mortgage limit with a bank according to Victor Peca, a mortgage broker with Mortgage Intelligence. "Some banks have higher approval limits whereas non-traditional lenders may have a maximum due to the source of where they get their funds from," says Peca.
Haque says another benefit of using a bank is that they may provide features other lenders may not, such as mortgage payment vacations or mortgage payment reductions. These features are typically available when a homeowner prepays their mortgage either by making an annual payment of up to 15 per cent of the principal or by making biweekly payments.
Homeowners can also develop a personal relationship with their bank. "Some people may like that homey feeling of walking into a branch and talking to someone," says Peca. However, being able to deal with a bank at a branch doesn't necessarily mean a homeowner will be in regular communication with them. "With banks homeowners have a transactional relationship," says Peca. "You won't get an email from a bank saying maybe it's a good time to refinance.
Interest rates can differ between banks and non-traditional lenders. Peca says non-traditional lenders may offer lower interest rates on mortgages because they don't have the overhead costs of maintaining branches and therefore staff. Homeowners who choose non-traditional lenders tend to pay a lower interest rate on an average of 1.4 per cent, according to Emily Hencz-Thornton, Director of Marketing for MCAP Service Corporation.
But not having a branch can be a drawback for some people who would like to have that option.
Homeowners must use mortgage brokers in order to borrow from a non-traditional lender (brokers also work with banks). Hencz-Thornton says this benefits homeowners because brokers work independently from the lenders and therefore provide the best borrowing choices.
Both Peca and Hencz-Thornton also say non-traditional lenders won't cross-sell their customers other financial products such as credit cards.
According to Peca, a drawback of using a non-traditional startup lender may be a longer processing time for documentation. Startup lenders may need more time if processing documentation is a new experience for them. "They will need to make sure that the due diligence is done properly for them, the buyer and their source of funds," says Peca. He adds that startups become faster in processing documents as they become more experienced in doing so.
Another con for some people is not being able to walk into a branch of a non-traditional lender.
Ultimately, a homeowner needs to look to the future when choosing a lender. Haque from TD Canada Trust says homeowners need to think about their mortgages on a long-term perspective and decide if the lender will be able to accommodate their borrowing needs in the future. Questions homeowners need to consider include:
- How long will you live there?
- Do you see your life stage changing? For example, do you see your family expanding or do you foresee yourself wanting to downsize?
- What are your overall financial goals? Do you have sufficient ability to pay off more than your required mortgage payment? Do you want to pay off your mortgage sooner and does your lender provide that flexibility?
- Will you be able to afford your mortgage payments in five years, particularly if the interest rates rise?