The short answer is yes; it does matter where you get your mortgage. We will outline the different options for a residential mortgage here in Toronto. Not only does it depend on the mortgage lender’s financial strength, but the interest rate, the amortization period, pre-payments, the term of the mortgage, portability should you decide to sell and move, and the fee associated with paying off the remaining mortgage.
Conventional First Mortgage
The typical first mortgage is from a central lender, like RBC, Scotiabank, BMO, TD, and CIBC. The big five banks, as they are called, will only ever be a first mortgage. They will not assume the risk associated with a second mortgage. The reason is that they want assurance that they get paid out if the property goes into mortgage default. The bank has to take over the property and sell it (note: no bank wants to be in a scenario where they are taking over a default property for purposes of a sale. There are many regulations that make the process challenging, unlike the United States.)
A conventional first mortgage is relatively straightforward in the sense that an applicant would have to prove a down payment, job status, letter of employment (self-employed is slightly different here,) and tax documents. The mortgage stress test is also a hurdle that must be overcome to be pre-approved or pre-qualified for a mortgage. The benefit of the big five banks is that you are assured that they won’t go into bankruptcy and be unable to hold your mortgage. Should a run on the bank or other large-scale issues occur, we would expect that the Federal Government would step in to prop up the financial stability through turbulent times. There can be some peace of mind that you are getting a competitive rate and economic stability.
Does Each Provider Cost the Same?
Note that each bank has its competitive differentiation from the next. RBC, for instance, will not work with an outside mortgage broker; they have their in-house mortgage specialists and keep the residential home mortgages within their purview. While other banks, like Scotiabank, use mortgage brokers as a means of lead generation and introduction. While the rates can be competitive from one to the next, it is important to understand pre-payments, buyouts and portability. The fine print can hold a lot of insight that mustn’t be overlooked. For instance, a three-month interest penalty for paying out the mortgage can be reasonable, or a $25,000 fee.
Another benefit of going with the big banks is cross-marketing from one line of business to another, such as investment advice, corporate accounts, and VISA options.
Gearing up to buy a home? Check out these related blogs for more advice!
- Is It Safe To Buy a Home Without An Inspection in Toronto?
- How Much Does it Cost to Buy a Home with a Real Estate Agent?
- What to Know About ROI and Resale When Buying A Home in Toronto
Second Mortgage
A second mortgage is less common. A second is what we call the secondary mortgage market. Smaller lenders and loan companies work in this area. The interest rates are higher, there can be one-time fees to set up a second mortgage, and there can be shorter terms, etc. This is more common for those who need short-term capital liquidity and/or are struggling to make ends meet with a job loss, higher interest rates, or those looking to invest in other businesses, stocks and property. Note that this is a higher risk. The secondary lender accepts the risk for a higher rate of return. In the case of a mortgage default, this lender acknowledges that the first mortgage lender gets paid first, no matter how much capital is in the property on closing – even if there is no capital after the first has been reimbursed fully or even partially.
Private Mortgage
A private mortgage could be an individual or a small company lending the funds. It could even be what’s called a Vendor Takeback Mortgage (VTB.) However, this has not been common in the last couple of decades. A VTB is an example of a home seller offering a mortgage to a buyer with a defined interest rate, fee, term, and amortization. It’s also worth noting that a private lender could be a friend, a private person or a family member. Needless to say, there are risks here. Is the individual in good financial standing? What is the fine print? Do they have any experience lending? Do you want to borrow from a friend or family member? How may that impact the relationship?
It’s also expected that a premium will be paid, like the second mortgage option stated above. The higher cost is because the lender typically offers a solution for the homeowner when other options, like the first mortgage overview, are not available to the buyer for myriad reasons. Note that no bank will take a second or third (etc) position behind a private lender. This type of mortgage is either the only mortgage holder, second, third, and so on.
Have more questions about mortgages? These advice-packed blogs may have the answers you’re looking for.
Choose Wisely
Choose your lender wisely. Owning a home is a financial risk; you must consider the pros and cons of each scenario well so that you can protect your downside and understand the realities of each option. You not only want to have a competitive rate, terms, etc, but you also want to ensure that you have inadvertently taken on a financial institution or other lender’s bankruptcy potential, as they would not be able to home the loan and would put you your financial position at risk. It’s no wonder why the big five banks in Canada do the vast majority of mortgage lending.
Getting ready to buy a home? I’m here to help. Reach me by email at ryan@ryanroberts.ca or call 416-925-9191.
