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!