How to Find a Mortgage Lender on a Property: A House Hunter’s Guide
When you take out a home loan, your interest rate, repayment fees and other mortgage charges are set by your lender, so it is imperative you choose one that can give you the best deal.
Read on to learn how to find a mortgage lender on a property and the factors you need to consider when comparing rates.
Types of Mortgage Lenders
In general, mortgage lenders in Canada are classed into two types: A and B lenders.
A-lenders
These include the six biggest banks in the country (the National Bank of Canada, Scotiabank, BMO) as well as provincially regulated credit unions. A-lenders offer the best rates but have the strictest requirements.
To apply for a mortgage from an A-lender you need a strong credit score. You might also be required to undergo a mortgage stress test.
B-lenders
Also known as Alt-A lenders, these mortgage providers have less stringent criteria than A-lenders but offer less competitive rates and terms.
There are several smaller banks in Canada classed as B-lenders, including First National, Home Trust and CMLS. If you have a poor credit score or are new to the country, B-lenders may approve you for a home loan, but you will get higher interest rates.
Alternative Mortgage Lenders
If A or B-lenders cannot meet your needs, you could give alternative lenders for a mortgage a try. Alternative mortgage lenders also have more flexible criteria, making them a good choice for borrowers that can’t qualify for a conventional home loan.
Private Mortgage Lenders
These are individuals, such as family and friends, or businesses (such as Prudent Financial or Alpine Credits) that lend money privately. They are not regulated as banks and other lenders are, allowing them to set their own criteria both for the approval process and the mortgage rates.
While private mortgage lenders can be flexible, they may also charge higher interest rates.
Monoline Lenders
As the name implies, monoline lenders provide lending solutions only and typically work together with mortgage brokers. Most monoline lenders in Canada are publicly traded corporations and mortgage investment corporations (MICs).
Since they have no overheads, monoline lenders can offer similar rates to banks and high-rated financial institutions, although loan terms may vary drastically from one lender to the next. If your mortgage broker refers you to this type of lender, make sure you ask for quotes from several providers to find the best possible deal.
Small Bank Lenders
Banks like Equitable Bank, Tangerine and Canadian Western Bank are federally-regulated but since they are smaller than Canada’s Big Six banks, they are not classed as A-lenders. Nevertheless, some of these banks offer the best mortgage rates in the country, so for borrowers who cannot get approved by big banks or credit unions, smaller banks can be the best option.
What Is a Mortgage Broker?
A mortgage broker acts as a middleman and connects the borrower with the mortgage lender. They don’t lend any money to clients.
Brokers typically work with multiple lenders and can help you find the best deal on the market. For their services, they charge 0.5-1.25% of the loan amount.
A mortgage broker can be very helpful in finding the right mortgage lender for your needs—they have access to a bigger network of lenders and know the ins and outs of the business. They might also introduce you to possible government schemes you could apply for to lower the cost of your mortgage, such as the Home Buyers Plan and the First Home Savings Account.
You can find a list of mortgage brokers in Canada here. Before you pick a broker, though, check if they are licensed as all mortgage brokers in Canada must pass certain exams to operate in the industry.
How to Choose a Mortgage Lender
As mentioned in the starting, choosing the right mortgage lender is as important as picking the right property to buy. So, don’t rush the process and compare as many lenders as possible.
Here are a few of the factors you need to compare.
Interest rates
The interest rate represents the amount of money you pay in interest over the life of the loan. According to the Financial Consumer Agency of Canada, interest rates offered by your lender are based on your employment status, credit history, the length of the loan term and the type of interest rate (fixed, variable or a combination of both).
The average interest rate for a 5-year term in Canada ranges from 4.5% to 6%. You may be able to find lower or higher rates, so carefully compare rates from lenders.
Fees
The monthly payment isn’t the only thing you pay after securing a loan. In fact, most lenders charge origination fees (ranging from 0.5 to 8% of the total amount), closing costs, early repayment charges and other fees. Therefore, compare the fees from multiple lenders along with the interest rates to ensure you’re not paying more in the long run.
Down payment
The amount of money you put down on the home to secure a loan is called a down payment. The lender will deduct your down payment from the purchase price of your home to calculate the size of your mortgage. So, the bigger the down payment, the lower your mortgage repayments will be.
The minimum down payment required by lenders in Canada is mainly determined by the price of your home.
Here is a quick breakdown of the lowest amount you can invest as a down payment.
- $500,000 or less: 5% of the purchase price
- Between $500,000 and $999,999: 5% on the first $500,000 & 10% on the remaining amount
- Over $1m: 20% of the purchase price
Bear in mind that other factors may impact the minimum down payment required. For instance, lenders will ask for a larger deposit if you are unemployed or have a history of bad credit.
Mortgage insurance
If your down payment is less than 20%, you have a high-risk job, or you’re self-employed and do not have a steady income, you’ll need to pay for mortgage insurance as well. This protects the lender in case you can’t make your monthly payments and typically ranges from 0.6% to 4.50% of your mortgage.
Questions to Ask a Mortgage Lender
In addition to looking at interest rates and the cost of the mortgage, there are a few other aspects to consider when choosing a mortgage lender. Here are some more questions you can ask:
- What are the qualifying criteria? What paperwork should I provide?
- How long will the process take?
- What else might my monthly mortgage payments include? Are there any hidden fees?
- What happens if I can’t make monthly payments? How much are late payment penalties?
- Can I make payments in advance? Is there an early repayment fine?
- Should I complete the process online, by mail, or in person? How do I keep in touch with you?
Don’t be shy to ask more if you feel the need to. After all, the more information you have, the easier your decision will be.
How to Get the Best Deal on Your Mortgage?
As stated above, the best rates are provided by the biggest banks and financial institutions in Canada. So what can you do to qualify for a loan from an A-lender?
You can find some helpful tips below.
Improve your credit score
Your credit score is one of the first things lenders look at, which means a poor credit rating will significantly reduce your chances of getting a good deal on your loan. Luckily there are several ways you can improve your credit score and qualify for a better offer.
Tip: The FCAC recommends ordering your credit report before you start the application process to make sure there are no errors.
Ensure your income is stable
Your lender will also look at your income to assess whether or not you can make mortgage repayments.
However, if you’ve recently lost your job or you have variable income (for instance, you are self-employed or a freelancer), you may need to provide additional documentation to prove that you can pay off your debt.
Set a budget
Before you seriously start shopping for a mortgage lender, it’s essential to know how much you can afford to spend on your house or apartment. Therefore, you must set a budget beforehand and stick to it. In turn, this will help you narrow down your options and make the process of finding a mortgage lender much easier.
Try to put down a bigger down payment
The more you deposit as a down payment on the home, the lower your mortgage will be. Plus, lenders are willing to offer better interest rates to borrowers with higher deposits, so it’s a win-win for you.
However, raising 20% or more of the purchase price is no easy feat. You could borrow the money from family or take out a loan for a down payment, but this might push you into more debt than you can handle.
Get pre-approved
Think of the mortgage pre-approval process as a practice exam before the big test. The lender will look at all the relevant criteria (income, credit score, purchase price) and will then provide you with the maximum amount you can borrow and the interest rate you can get.
This does not mean that you will be approved for that amount or that interest rate, but it will show you how much you can get so you can plan your finances accordingly. For example, if the maximum mortgage you can receive is not enough to purchase your dream home, you should start looking at cheaper properties.
Conclusion
A house is one of the biggest purchases you will ever make, so don’t rush the process. Take your time to assess your financial situation first and improve your circumstances if possible. Then carefully compare lenders and their offers. Once you choose a lender and decide on the interest rate, read and reread the loan agreement to avoid any surprises or unplanned mortgage expenses in the future.
FAQ
A lender is an individual, organization, or institution that lends funds to people or businesses with the expectation that the money will be repaid with interest.
To choose the best mortgage lender for you, you’ll need to pay attention to your credit score, ensure a stable income, set a budget, shop around and compare lenders, save for a down payment, get pre-approved, and understand the points on your loan agreement.
To avoid confusion and unexpected costs, you should ask your lender as many questions as possible about the loan, from the interest rate to extra costs and fees. This is no time to be shy—you need all the information you can get to make the right decision.
For one, low-interest rates and favourable terms. You should also try to find a mortgage lender that does not have high additional fees and offers flexible and convenient payment options.
Last but not least: When it comes to how to find a mortgage lender on a property, look for one that is willing to work with borrowers in your financial position. If you have poor credit, there is no point in applying with an A-lender. Try a private or hard money lender, instead.