Why there's no stigma in 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% of new Canadian mortgages, according to a report published by the Canada Mortgage and Housing Corporation. 

There are many benefits to borrowing from a big bank: They tend to have solid reputations honed over many years, offer services nationwide, and are a convenient option, especially if you’re already using their banking services. 

But that doesn’t mean you should overlook lenders beyond the Big Six. Alternative lenders typically offer lower mortgage rates, and are often the best option for many homebuyers.  

Here’s why they’re worth considering.  

Hesitations around alternative “A” lenders 

According to Leah Zlatkin, LowestRates.ca expert and mortgage broker, first-time homebuyers tend to be more nervous about shopping outside the big banks for a mortgage. Actually, most of her clients prefer to go 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). 

However, when it comes to a second home purchase, they’re more comfortable exploring other options. “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 hesitate around alternative lenders. For one, 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 help with the down payment or to co-sign the loan). “If [parents] 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 can 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, the client still needs to pass the mortgage stress test at — or above — the minimum qualifying rate set by the agency.  

The OSFI also have mechanisms in place to detect, prevent, and report suspected or confirmed fraud or misrepresentation to mortgage insurance providers. 

As for apprehensions that smaller lenders are at bigger risk of folding than big banks, Zlatkin says in the case of a company closure,  consumers aren’t likely to be impacted. 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 this. 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. These clients may have lower credit scores, unreliable sources of income, or trouble passing the mortgage stress test.  

They 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. 

Read more: What’s the difference between A lenders, B lenders and private mortgage lenders?

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. 

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

“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. 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. 

*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.