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Banks & Lenders in Canada

There are a large number of mortgage lenders in Canada competing to lend money to borrowers who are looking to mortgage a property, so it is no wonder there are some great mortgage rates. But, are the current rates really lower than the big banks and if so by how much?

When rates are low, a mortgage lender can beat a 5-year posted rate by over 1.5 percent. When rates are high, you can save up to 3 percent on certain mortgage terms. Even if a bank gives you their “special offer”, a mortgage lender can usually beat it by least one quarter of a percent. It might not sound like much, but it does add up to thousands of dollars over the life of the mortgage.

Why are a mortgage lender rates so much better than the big five banks in Canada?

The answer is simple, but first understanding the difference between the banks and any Canadian lenders you are familiar with is important. Banks are typical "bricks and mortar" types of establishments which means they have physical branches and often several within a few square blocks. Having physical locations means having costs to run a company and overhead plays a huge factor in what rates they can offer. For example, large consulting companies that charge astronomical fees for their services have to because of the sheer amount of costs associated with running their company (e.g. hiring and maintaining staff, advertising costs, etc.). These overhead costs quickly make an affordable service unaffordable.

This is where mortgage brokers differ. Canadian mortgage lenders may not have a large "household" name attached to their business, but they have money and are willing to lend it at a much lower rate than the big five banks. Their overhead is comparatively lower because mortgage lenders don't advertise or have a marketing budget, they don't have branches on every corner in every major centre in Canada, and they don't have full-time sales staff pushing their products.

Did you know?

Each of the big five banks has, on average, over 40 branches in Vancouver, over 20 branches in Calgary, and over 100 branches in Toronto? If you do the math its easy to figure out where all of those service charges are going and why your mortgage rate is much higher with a big five bank.

Mortgage brokers use lenders in Canada that typically have one or two office locations in either Vancouver, Calgary, or Toronto. All underwriting for your mortgage loan is done through one of these locations and typically they are large, cost effective underwriting centres. These are housed with the best mortgage underwriters in the business who can quickly and efficiently approve your mortgage loan while passing along all those savings that, if you had used a big bank, would have gone to pay for one of their hundreds of physical branches.

The math is simple and it is easy to see why our rates are so much better than the big banks. Our lenders (over 100 in Canada) are now considered the strongest, most sound financial institutions and suppliers in the world. Their smart, conservative approach to lending has helped them to avoid a similar disaster to that of other lenders around the world. Our lenders have maintained a solid lending platform and for the most part have made themselves immune to the problems plaguing the United States and other countries. For that reason, mortgage brokers in Canada have done everything they can to support these forward-thinking financial pillars.

Where does the money come from?

Money comes from many sources, but the real question is, how can these lenders who may not take deposits or sell investment certificates themselves, continually receive more funds to keep on lending month after month? This process involves Mortgage Backed Securities, the Canadian Housing Trust, Government of Canada and the Canada Mortgage Bond.

Where does it all begin?

The easiest way to explain this process is as follows:

  1. “Approved Sellers” (trust companies, mortgage companies, banks, etc.) use their money to lend to Canadians when they apply for a mortgage. Once they have used up their money, they pool these loans together to be sold. When they sell these pools, they have replaced their supply of money and start the process again.
  2. On the other side, investors buy Canada Mortgage Bonds (CMB) that are issued or created by the Canada Housing Trust (CHT). The Housing Trust and the Government of Canada guarantee the repayment of interest and principal on those CMB’s to that investor. That money from the CMB investor who purchased that bond, is received by the CHT and used to buy Mortgage Backed Securities (MBS) from the “Approved Sellers”.

What is a Mortgage Backed Security?

An MBS is a collection of debt originating from residential mortgage loans administered and underwritten by “Approved Sellers”. These eligible loans are pooled, securitized and sold. Typically, a pool size is 2 million dollars minimum, contains mortgages that are insured and has a minimum maturity stipulation. They also follow strict guidelines set forth by CHT to maintain low risk for the CMB investor. Securitization is used partly to distribute the risk of the pool by aggregation of the debt within that pool, thus converting the mortgages into “securities”. They will then contact a buyer for this money pool like The Canada Housing Trust.

What is the Canada Housing Trust?

This is a trust that basically transforms the cash flow from the MBS to the CMB. Thus making it a safe, secure and guaranteed “bond like” investment. The CHT has a guarantor, Canada Mortgage and Housing Corporation (CMHC). This guarantor makes sure that certain requirements are continually met so they can safely guarantee these bonds for the investor. CMHC also advises on the overall operation of the bond, issuance of bonds, etc. What is a Canada Mortgage Bond?

A CMB is a low risk investment vehicle designed to make mortgage funds more readily available to the Canadian consumer. Based on the concept of supply and demand it automatically creates a larger availability of affordable mortgage financing in the marketplace. Should any of this matter to you and why is it important?

This entire process is like the inner workings of a fine watch. All you see is the two hands moving in perfect precision. You probably don’t really think about how many gears are inside that watch, how often it needs to be lubricated and whether it needs to be wound or requires a battery. The process from MBS pooling to CMB investment is more important than you may realize. Each part of the process is necessary and provides you, the Canadian mortgage client with:

Who are these mortgage lenders?

Some of the lenders used by mortgage brokers may include companies that are owned by large banks or financial institutions in Canada. For example, CIBC owns Firstline Trust, which provides billions of dollars in mortgage funds to the mortgage broker networks in Canada. TD Canada Trust owns VFC Financial, which loans money for homes, cars and even retail needs. GMAC Residential Funding in Canada owns ResMor Trust, which is a mortgage broker only lending channel.

Many mortgage lenders have large financial backing, but operate under different company names for the Canadian Mortgage Broker Industry. All lenders in Canada that deal with mortgage brokers are sound companies with solid reputations from coast to coast.