Why you shouldn't feel stigma for not going with the big banks for your mortgage

This article has been updated from a previous version.*

When it comes to shopping for mortgages, most homebuyers in Canada tend to take a conservative approach.

This means shopping with the country’s six big banks: In 2019, RBC, BMO, CIBC, Scotiabank, TD, and the National Bank of Canada generated nearly 70% new Canadian mortgages, according to a report published last year by the Canada Mortgage and Housing Corporation.

There are definitely benefits to borrowing from a big bank: they have solid reputations honed over many years, offer services nationwide, and are a convenient option if you already use their banking services.

But that doesn’t mean you should overlook lenders beyond the Big Six. Although alternative lenders typically offer lower mortgage rates, many homebuyers dismiss them for their perceived risk.

We spoke to Leah Zlatkin, principal broker and co-founder at Brite Mortgage Inc. and LowestRates.ca expert, to demystify common misperceptions around alternative lenders, and explain why, for many homebuyers, they may actually be the best option.

Hesitations around alternative “A” lenders

As a mortgage broker, Zlatkin connects most of her clients with “A” or prime lenders — traditional mortgage lenders that service clients with good credit scores and reliable sources of income. These lenders include the six big banks, but they also encompass some smaller banks, credit unions, and lenders that specialize only in mortgages (known as monoline lenders).

In Zlatkin’s experience, first-time homebuyers tend to be more nervous about shopping outside the big banks for a mortgage. But when it comes to a second home purchase, they’re more comfortable straying from the traditional. “The second time around, people are usually very happy to go with whoever has the lowest rates,” she says.

There are several reasons first-time homebuyers have this hesitation. Because it’s likely their first time navigating such an expensive purchase, “They’re unsure of what is to come and it feels much more comfortable. . . to know you could walk into the bank on the corner,” Zlatkin says.

First-time homebuyers are also more likely to involve their parents in the mortgage (whether for the down payment or to co-sign the loan), who started banking when there were fewer options outside of the big banks. “If they feel very comfortable with that institution, they're probably going to push their child or children toward the same institution,” Zlatkin explains.

Another common fear among homebuyers is that smaller lenders are less established, less stable, and therefore more likely to put their clients’ money at risk. But, Zlatkin says, that’s simply not the case.

Why you should trust alternative “A” lenders

Prime lenders are regulated by government agencies. The Office of the Superintendent of Financial Institutions (OSFI) oversees federally regulated lenders, while provincial regulators oversee the operations of most credit unions. 

Zlatkin says OSFI subjects all federally regulated lenders to the same set of rules, whether they’re part of the Big Six or not. For example, before any of these lenders can issue a conventional, or uninsured, mortgage, they need to stress test the client either at, or above, the minimum qualifying rate set by the agency. They are also required to have mechanisms in place to detect, prevent, and report suspected or confirmed fraud or misrepresentation to mortgage insurers.

As for suspicions that smaller lenders are more likely to fold than the big banks, Zlatkin says even if that theory does pan out, the business change isn’t likely to impact consumers. If a lender is “no longer going to be practising, another lending institution would buy them out and acquire all of their debt,” she says.

Zlatkin cites her own experience with such a change. In 2019, she had a mortgage with Street Capital when it was suddenly acquired by another company, RFA Capital. Zlatkin says she received an email informing her that her mortgage was now with RFA Capital, but the transition was otherwise seamless and didn’t require her to make any changes in how she approached her payments. 

The right way to borrow from “B” lenders

“B” lenders service clients that have a hard time qualifying for loans from “A” lenders — whether because they have lower credit scores, unreliable sources of income, or trouble passing the mortgage stress test. This could include people who are new to Canada and therefore haven’t established credit yet, people who get most of their income from gig jobs like driving for Uber, and even some business owners, Zlatkin says.

The catch with “B” lenders, though? The mortgages they offer come with interest rates that can be 1.25% to 2% higher than those offered by “A” lenders, according to Toronto-based mortgage brokerage firm CityCan Financial. They often also charge a 1% lender fee.

While there are some instances where Zlatkin will connect a client with a “B” lender, she emphasizes that any mortgage you receive from one should be short-term.

Loans from “B” lenders typically only have terms lasting between one and three years, she says. During this time period, the borrower should focus on fixing whatever issue prevented them from qualifying for an “A” lender mortgage in the first place.

“The thing that’s really important here is to understand that if you do get placed with a ‘B’ lender, it’s not a bad thing,” Zlatkin says. “This is a stepping stone for you — you’re starting at a ‘B’ lender, but whoever’s working with you wants you to get to an ‘A’ lender.”

The broker connecting you with that loan should always have this goal in mind, she adds. “If you’re talking to somebody who is trying to help you and they don’t give you a plan, that’s not the right person. You need a plan to get out of the ‘B’ lending space."

That principle applies to alternative “A” lenders, too, she says. Working with a broker who is interested in your long-term financial health will help you get the right mortgage, regardless of whether it comes from a big bank or a smaller lender. You can do your part by using a site like LowestRates.ca, which allows you to compare mortgage rates from both the big banks and alternative lenders.

The mortgage you secure should be based on your specific needs, your own research, and guidance from your broker — not the stigma around alternative lenders.

*A previous version of this article stated that prime lenders are all regulated by The Office of the Superintendent of Financial Institutions (OSFI). This is not entirely accurate, as OSFI oversees federally regulated lenders but provincial regulators oversee the majority of credit union operations. We regret the error.