Getting a mortgage is a massive part of the home-buying process, but finding a lender can be tricky. Here’s what to know before choosing a mortgage lender in Canada.
What is a mortgage lender?
A mortgage lender is a financial entity or institution that provides financing to purchase any real estate. A mortgage lender will have specific guidelines that need to be met for a borrower to qualify for the loan. Once approved, the lender will set the loan terms, which include a repayment schedule, the interest rate and more.
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Types of mortgage lenders: A lenders vs B lenders
Several different institutions will offer traditional mortgage loans. These lenders are classified into two categories based on the criteria and requirements borrowers need to qualify for a mortgage.
‘A Lenders’ are the types of financial institutions that first come to mind when you think about getting a mortgage. These are the big banks and credit unions most Canadians are familiar with, such as RBC, BMO, Scotiabank and the National Bank of Canada.
To be approved by an A lender, you must have a strong credit score and credit history. Additionally, since the federal government regulates big banks that are A lenders, you will have to undergo a mortgage stress test to qualify.
Most credit unions are provincially regulated, but they still tend to follow the stress test guidelines. If you pass the stress test or qualify as a creditworthy borrower, an A lender will likely approve your application.
Using an A lender comes with many advantages, the main one being that borrowers deemed creditworthy will qualify for the best possible rates. However, qualifying can be challenging, which puts some borrowers at a disadvantage.
A ‘B lender’ (which is also sometimes referred to as Alt-A lender) offers mortgage options for borrowers who can’t meet the strict qualifications of an A lender.
B lenders include a number of smaller Canadian banks and mortgage investment corporations, including Canadian Western Trust, Home Equity Bank and Home Trust.
The advantage of using a B lender is that the criteria to qualify aren’t nearly as strict as with A lenders. B lenders are more willing to give mortgages to individuals with a poor credit history or those without a guaranteed income, like new Canadians or self-employed individuals.
Since B lenders take on an added risk, borrowers end up paying a higher interest rate.
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What to look for when choosing a mortgage lender
When choosing a mortgage lender, you need to do your work and put in the research. Getting a mortgage will likely be the biggest loan of your life, so you want to make sure that you are comfortable and confident with your terms and agreement.
Here are a few things you should look for and questions to ask when comparing mortgage lenders:
- What is the interest rate? Obviously, you want the lowest rate possible.
- What happens if you can’t make a mortgage payment?
- How is your mortgage calculated?
- What is the cost to get out of your mortgage, if needed?
- Is there a prepayment privilege? What are the prepayment penalties?
- What are the monthly payments?
Don’t be afraid to ask lots of questions. Make sure you fully understand what you are getting into before you sign the contract and take the time to read the fine print. It’s also worth noting that mortgage laws differ from province to province, so educate yourself on your province’s rules and be aware of what is legal and not if you are dealing with an alternative lender.
If you get turned away from a bank, credit union or another traditional lender, there is still the option of a private mortgage lender.
A private lender is typically known as an ‘angel investor.’ These are individuals or institutions with a high net worth that specialize in private lending. Private lenders see granting mortgages as investment opportunities and aren’t nearly as strict as traditional lenders, making them an option for individuals with poor credit or bad credit history.
Getting a private loan can be quick and easy. However, it also comes with higher rates and is riskier.
How much can you borrow for a mortgage?
A mortgage lender will give you as much as you need, so long as they think you can afford it and will pay it back. You can prove this with the mortgage stress test, which helps determine how much you can actually afford. If you want to get a mortgage with an A lender and get the best rates, you will need to pass the stress test.
What happens to a mortgage when the lender dies?
Typically, the mortgage is recouped from the estate when the lender dies. The mortgage stays with the home in Canada, not the person. The debt doesn’t just disappear, and it must be repaid.
Can you change lenders?
Yes. Mortgage contracts are signed for a specific period referred to as a ‘term.’ Terms can last a few months up to 5+ years, depending on your agreement.
When your contract is up, you need to renew your mortgage if it hasn’t been paid off in full (most people require multiple terms to pay off their mortgage). You can continue with the original lender or shop around and change lenders if you find a better deal.
If you change lenders, you will need to be approved, and they may have different qualifying criteria than the original lender.