Institutional Lenders comprise Schedule 1, 2 and 3 banks, credit unions, loan and trust companies, finance companies or other corporations constructed to lend money on real estate. The Lender may also be referred to as the mortgagee.

Schedule 1 (banks that are Canadian owned)
Schedule 2 (branches or subsidiaries of foreign banks)
Schedule 3 (foreign owned banks operating in Canada)

It’s likely that you already know what’s offered by the big banks and local credit unions, but have you heard of monoline lenders? Here’s why they’re in the market:

Monoline lenders provide a single (hence ‘mono’) yet refined service: personalized mortgage financing. Banks and credit unions, on the other hand, offer diverse products and services in addition to mortgages.

The monoline lenders will not cross-sell you on chequing/savings accounts, RRSPs, RESPs, GICs or anything else. These products and services are not even available to them.

If you are questioning the reputability of monolines, rest assured that many of these lenders have existed for decades. In fact, Canada’s second-largest mortgage lender through the broker channel is a monoline lender. Many monoline lenders source their funds from Canada’s big banks, as these banks are always interested in diversifying their portfolios and making money for their shareholders through alternative channels.

Monolines are also known as security-backed investment lenders. Every monoline lender secures mortgages with back-end mortgage insurance provided by one of the three insurers in Canada.

During the origination, refinance or renewal period, monolines are only accessible through mortgage brokers. A licensed mortgage professional (such as myself) is the only one who can secure a mortgage for you through a monoline lender. However, once the loan completes, you can communicate with your new lender directly via phone, email, or online with any servicing questions you may have.

With no physical location, your lender saves on overhead costs, and these savings give you the benefit of reduced rates and penalties.

Banks and monoline lenders primarily differ in their exit penalty structure for fixed rate mortgages. Monolines offer a much lower exit penalty because they calculate the Interest Rate Differential (IRD) penalty differently from banks. The banks utilize a calculation called the posted-rate IRD while the monolines use an IRD calculation called unpublished rate.

In Canada, 6 out of 10 households break their existing 5-year fixed term around 38 months in. This means an average penalty of 22 months against the outstanding balance. Given that the average Ontario mortgage is $300,000, the penalty from a bank would be around $14,000. The exact mortgage with a monoline lender would be $2,600. So, in this case, the monoline exit penalty is $11,400 less.

Looking for a lending institution that meets your specific needs? Get in touch and I can help you.

Subscribe to receive monthly Home, Lifestyle & Economic News here.