12 Jan

What is a Monoline lender? 

About Mortgage Brokers

Posted by: Garth Chapman

What is a Monoline lender?

A Monoline lender, by definition, is a mortgage lender that focuses on just mortgages.  They do not have any other products that can be cross-sold and most Monolines securitize their mortgages, instead of keeping them on their balance sheet.  Monolines are secure, follow the same rules as all Canadian Banks and they deal exclusively with Mortgage Advisors on their clients’ behalf.

Advantages of a Monoline lender

  • They focus on one thing: mortgages.  For you that also means they do not try to cross-sell you into credit cards, investments or insurance.
  • Monolines have a much lower IRD (Interest Rate Differential) pre-payment penalty calculation, which is important if you are required to get out of your mortgage before the end of your term. In my own personal experience the Monoline penalties are up to 2/3 less than those of the big-six banks.
  • They often have products that specialize in a range of solutions aimed at borrowers with lower credit scores and those with self-employed income sources.
  • No storefronts mean lower overhead which in turn they pass along to you in the form of lower interest rates.
  • Monolines are heavily regulated and follow the same lending guidelines as all the major banks in Canada
  • Pre-payment options are often greater than the big-six banks offer.
  • Online access to your mortgage and customer service departments is excellent – it has to be – they don’t have branches.

This article by financial writer Rob Carrick was published in the Globe and Mail comparing Scotiabank to ING regarding their vast differences in penalty calculations.  As much as we try to explain what a Monoline differs from a bank, an article from a third party drives it home.

Even when the rates are the same between banks and the Monoline borrowers should always factor the potential IRD into their decision making as one never knows what will happen in the future

To summarize, Monoline lenders tend to provide better rates over the big banks, have favourable penalty calculations, and foster relationships with brokers to ensure the business comes back to them (including having a renewal model to reduce churn).

22 Jul

Do you have a HELOC on your home, vacation or rental property?

Buying & Refinancing a Home

Posted by: Garth Chapman

If you have a Line of Credit (HELOC or LOC) on your property you are paying a much higher rate of interest to the bank.  Why not put some of that money in your own pocket instead of in the bank’s? Your savings will likely be in the range of 1% or more of the outstanding balance.  That would amount to $3,000 per year or more on a $300,000 HELOC.

So let’s take a look at the details and at my philosophy around this.  I have split my thinking into two types of debt for purposes of this post.

YOUR LONG-TERM DEBT:

You want to have your long-term debt in a mortgage, which means it would be at a lower interest rate than you will pay on a LOC.  This is true for both Variable and Fixed rate mortgages. The mortgage should be/have:

  • Should be portable if there is any chance of you wanting to move during the 5-year term.
  • Can be registered at full appraised value if you want to later be able to increase the LOC or the mortgage without having to incur the costs of refinancing.  This option precludes putting a LOC or 2nd mortgage on the property with a different lender.
  • Should be transferable at time of maturity. When a mortgage matures (the term ends) you become essentially a ‘free agent’. By this I mean that you then can shop around for the best deal and move to another financial institution without cost. This works to ensure your existing mortgage lender offers you a competitive rate.
  • Lenders will normally allow the mortgage to be split into 2, 3 or more separate mortgages within the All-In-One product.  This allows borrowers to easily track amounts borrowed for various purposes.  This is especially helpful when some debt is tax deductible and some is not.
  • Collateral mortgages are generally not portable, and are not transferable at maturity.
  • Should have good pre-payment and payment increase privileges.

YOUR SHORT-TERM DEBT:

Your short term debt should be in a secured LOC at the higher rate.

  • Your LOC rate should be in the range of Prime + 0.50% (at the time of writing).
  • Your LOC should ideally be connected to your mortgage – referred to as an All-In-One (AIO) mortgage product. Each bank has their own name for this product.
  • Ideally the LOC should increase automatically as you pay down the mortgage. Only some banks do this. This gives you more flexibility over time especially when you decide to buy something.

We have several of these AIO mortgages, and over time they have allowed us to buy several more properties over the years by easily tapping the equity in our existing properties via those LOCs.

Some Lenders will allow the LOC to be split into 2, 3 or more (up to 9) separate accounts within the All-In-One product. This allows borrowers to easily track amounts borrowed for various purposes.  This is especially helpful when some debt is tax deductible and some is not.

A quick thought on mortgage pre-payment penalties:

If you don’t want/need a LOC that is connected to your mortgage, and if you are on a fixed rate mortgage, then you should consider having your mortgage with a lender that is not one of the big-6 banks. The reason is that their pre-payment penalties are 2-3 times higher than the non-bank (known as Monoline) lenders.  I have personal experience with this issue and would be happy to explain further, and even provide examples.