What is a Monoline?

General Victor Anasimiv 27 Apr

When shopping around for a mortgage, you may be tempted to simply walk into the bank or credit union you’ve been dealing with for years, thinking that that’s your best or only option.  But it’s in your best interest to explore all options.  While banks and credit unions do offer great rates and products, another important type of lender to be aware of is what’s known as a monoline lender.

What is a monoline?  As the name suggest, they are a lender than provides one service – mortgages.  This is their specialty.  They do not try to cross-sell on the wide array of other products typically offered by other institutions – credit cards, lines of credit, GICs, etc.  They arrange mortgage financing, and they do it well.

As they specialize in only mortgages, it’s possible that you may not have heard of them.  But not to worry as monolines are very reputable, and many have been around for decades. In fact, First National, Canada’s second-largest mortgage lender through the broker channel is a monoline lender. Many of the monoline lenders actually source their funds from the big banks in Canada, as these banks are looking to diversify their portfolios and they ultimately seek to make money for their shareholders through alternative channels.  In that sense, they are just as secure as a big bank.

Monoline lenders can only be accessed by mortgage brokers.  There is no ‘bricks & mortar’ branch that a person can walk into and talk to a representative about mortgages.  Since there are no costs associated with renting or leasing a building or paying for branch staff, this saves on overhead which in turn saves you money.  As with most things these days, everything can be handled by phone or email.  Just pick up your smartphone and call or email with any questions.  Or better yet, ask your mortgage broker for help!  That’s the great thing about having me as your mortgage broker.  I’m here to help for the life of your mortgage.

One of the most important differences between banks and monolines would be the way that pre-payment penalties are calculated.  In Canada, it’s estimated that about 60% of 5-yr mortgage terms are broken before they are over.  It is a great idea to be aware of this difference in penalty calculation.  The difference lies in how the lender calculates what is known as an Interest Rate Differential (IRD), which is based on the spread between your contract rate and the prevailing interest rate at the time the mortgage is broken.  The larger banks are notorious for using a very prohibitive method of calculating this penalty. While a big bank will use their posted rate, a monoline will typically used their unpublished rates.  As posted rates are higher than unpublished rates, the corresponding IRD will be higher. I will save the specific calculations for a future article that examined penalties more closely, but the important take-away here is that this slight difference could save you as much as $10,000 or more in certain instances.

There is certainly something to be said for familiarity.  Some clients prefer to bank with an institution they’ve heard of or banked with for years.  Others might prefer to go with a different lender in order to diversify.  But it’s important to at least be aware of all options available when it comes time to get a mortgage.  As your mortgage broker, it is my duty to educate you about these options and answer any questions you may have.  Contact me today!

Pre-Approvals Don’t Approve Anything

General Victor Anasimiv 6 Apr

Although going through the pre-approval process is important, the actual term ‘pre-approval’ is often misunderstood.  The term is actually a bit of a misnomer – as nothing has actually been approved, per se.  I prefer to use the term ‘pre-qualified’.  A pre-approval is really nothing more than a rate hold.  At this point, the lender hasn’t underwritten the deal.  That is, nothing has been confirmed with respect to strength of a client or quality of a property.  Based on the information provided by a client, I can ‘pre-qualify’ them and let them know the maximum mortgage they would qualify for, subject to the lender’s final approval.

All too often clients hear the phrase “You’ve been pre-approved….” and assume they have their financing sorted.  An important point to be clear on is that while you may be pre-approved for a certain mortgage amount, there are several variables that can derail a final approval once you write an offer on a property. This is why you should always include a ‘subject to financing’ clause in your offer to purchase.  This is arguably the single most important clause in a contract (an inspection being a close second), because without the financing, how will you complete your purchase?

The pre-approval process should be considered more of a personal pre-screening process than anything.  With most lenders pre-approvals involve no formal review of documents, but as your Mortgage Broker, I can preview them to catch any significant areas of concern such as:

  • Taxes not filed
  • Unpaid taxes
  • Issues with credit history
  • Employment still in a probationary period
  • Source of downpayment

Furthermore, government changes to lending guidelines and policies can render a pre-approval invalid just a few days later, without warning.

By all means, ask for a pre-approval, as it gives you a good idea of your maximum mortgage amount and locks down a rate for you.  In some cases, a vendor may take a potential buyer more seriously with a pre-approval in hand.  Plus, here in BC, a pre-approval is a requirement if you are interested in applying for the new BC HOME loan program.  But please be aware that a pre-approval is not an absolute guarantee of mortgage financing.

If you would like to discuss your options and get a better idea of what you can afford, contact me today!