A growing number of buyers looking to land themselves a higher mortgage amount are turning to alternative lenders like credit unions that have less rigid guidelines than big banks, a new release from RATESDOTCA says.
After the Bank of Canada raised its historically low overnight lending rate in March, followed by a subsequent hike in April, buyers looking to qualify for mortgages have been met with much higher interest rates. Fixed-rate mortgages from traditional lenders now sit in the 4% range, the RATESDOTCA release says. Thanks to Canada's mortgage stress test, which is required to be met by all borrowers, buyers are no longer able to qualify at a rate of 5.25% -- the minimum rate set by the stress test -- but rather are having to qualify in the 6% range -- the lender's rate plus 2%.
“As a result, many are turning to alternative lenders, including credit unions and private lenders, in order to avoid the qualifying rate and secure a higher mortgage,” said RATESDOTCA expert and licensed mortgage agent Sung Lee.
Although many credit unions may offer similar services to a traditional bank, they don't necessarily operate in the same way. Unlike federally regulated lenders like the 'Big 5 Banks', provincially regulated credit unions are not required to follow the same set of rules. Regulations tend to vary from province to province, with provincial legislations dictating how they can lend, borrow, and invest. This means they can typically offer mortgages to clients who may not qualify at the federally mandated stress test rates, as well as offer higher loan-to-value rations on a home equity line of credit.
“Credit unions are becoming popular with clients seeking higher mortgage amounts," Lee said. "While the rate on conventional and/or uninsured mortgages at credit unions may be slightly higher than traditional lenders, many will qualify their members based on the contract rate and even at a 30-year amortization."
Credit Union regulations still require them to qualify borrowers at the traditional stress test rate if they're seeking an insured mortgage, meaning they're paying with less than a 20% down payment. But as Lee notes, they're finding ways to make themselves an attractive option.
“To separate themselves, some are pricing very competitively to capture a higher market share in this segment," Lee said. "We are seeing fixed rates as low as 3.64% whereas a competing bank is at 4.49%.”
Although they can offer better rates, credit unions typically have other specific criteria that borrowers need to meet. For example, the borrower may be required to live, attend school, or work in the immediate area. This is more common with smaller unions, whereas bigger credit unions often have no local requirement and are open to anyone in Canada. Some credit unions can also cater to specific professions like government employees, farmers, or teachers.
Since credit unions are exactly that -- unions -- anyone looking to borrow from one has to become a member. This typically means sending in an application and paying a nominal fee to buy a set number of shares. One upside of this that draws many lenders in, in addition to lower qualifying rates, is that the unions are responsible to its members rather than shareholders.
