Mortgage 101: Types of lenders in Canada

Canada has one of the most stable and diverse mortgage markets in the world. But the downside of having so many options to choose from is that homebuyers can get a little confused when trying to decide which lender is right for them.

If you’re in the market for a new mortgage – or will be looking to renew your existing loan anytime soon – here’s a brief overview of some of the main types of mortgage lenders that operate in Canada, along with a few of the pros and cons that each has to offer.

Preferred lenders (a.k.a. prime or A-lenders)

Preferred mortgage lenders (also referred to as “A-lenders” or “prime lenders”) are the big financial institutions most Canadians think of first when they think about applying for a mortgage – namely, Canada’s six biggest banks (Royal Bank of Canada, BMO, CIBC, TD, Scotiabank and National Bank) as well as a select handful of other large banks, credit unions and other institutions.

As of late last year, the “Big Six” banks accounted for around 69.9% of all new mortgage loans issued in Canada. And there’s a good reason why these high-profile lenders tend to be the most popular choice for homebuyers across the country.

Because they’re so well-established, A-lenders can usually offer the best mortgage rates and most flexible terms. But because they have to abide by the most stringent government regulations, preferred lenders will also generally only approve buyers with spotless credit, stable income, and who can easily pass the federal mortgage stress test.

Alternative lenders (a.k.a. B-lenders)

Alternative lenders (or “B-lenders”) are financial firms that loan money to buyers who may not meet the strict requirements to qualify for a mortgage with an A-lender. This includes smaller banks and credit unions, financial services cooperatives, insurance companies, trust and savings firms, and retail or credit associations.

Because of the added risk, alternative lenders usually charge higher rates than preferred lenders. But they can be a great option for borrowers who have unconventional or unpredictable income sources, smaller down payments, more complex credit histories or financial situations, or who are self-employed.

Monoline lenders

Monoline lenders are non-banking financial institutions that specialize exclusively in providing mortgages to homebuyers, rather than issuing chequing accounts, selling GICs or offering other types of loans.

Monoline lenders generally operate only through mortgage brokers. But because their qualification requirements are often less stringent than more traditional lenders, they can also sometimes offer better rates, different terms, or more flexibility with things like prepayment options.

Private lenders

Private lenders are businesses or individuals who loan money outside of the traditional banking system. These can range from from private loan companies, mortgage investment corporations and mortgage funds to friends or family members (i.e. the “bank of mom and dad”).

Because they don’t need to meet all of the regulatory requirements that apply to banks and large credit unions, private lenders can generally set their own terms and conditions, and approve whoever they want. They also tend to approve borrowers based more on the value of the property as collateral for the loan, rather than the buyer’s income or credit rating.

But because this also often means assuming an added level of risk, private lenders also usually charge higher interest rates and fees than traditional lenders.

Mortgage brokers

Mortgage brokers don’t actually lend money. Instead, they find out everything they can about their clients’ goals, credit scores, and employment and income history, and then match them with a shortlist of lenders that can best meet their needs.

Mortgage brokers generally operate on a fee or commission basis, which is typically charged to the lender. But in addition to taking a lot of the time and legwork off your plate, brokers can also often find better rates or more personalized terms than many buyers are able to access on their own – which could mean helping you get the property you want quicker, and at a monthly payment you can afford.

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Have any questions about which type of lender (or loan) might be right for you? Contact us to schedule your free consultation today!