As worries about housing affordability intensified while Canada’s housing prices continued to soar, the Canadian government looked towards cooling down the housing market by making it harder for Canadians to qualify for a mortgage. This was done by making the mortgage stress test harder for homebuyers that make a down payment larger than 20%.
This recent change will make some Canadians unable to get a mortgage to purchase a home, and for others, it will reduce the maximum amount that they can borrow. While this will reduce housing demand, simply by making a portion of the market unable to enter the market in the first place, what will this mean to you?
If you’ve been denied a mortgage from a major bank, you can still get a mortgage from a credit union or a B lender. The mortgage stress test is required for mortgage applications to banks, as banks are federally regulated. Getting a credit union mortgage is a workaround to this rule, as credit unions aren’t required to follow the federal mortgage stress test. This means that even if you fail the stress test from a bank, a credit union may still be able to approve you for a mortgage.
Benefits of Mortgages from a Credit Union
Even if you can qualify for a mortgage from a bank, why should you consider getting a mortgage from a credit union? Credit unions offer competitive rates, and you might even see credit union mortgage rates being lower than the rates offered by the major banks. That’s because customers of a credit union are members that the credit union works for. On the other hand, major banks only answer to their shareholders and investors to extract money from their customers.
Another big perk comes from being a credit union member, and that’s profit-sharing. Credit unions are not-for-profit in Canada, which means that their excess profits will be invested back into the local community through donations, sponsorships, or scholarships, or the excess profits will be returned back to their customers. Banking with a local credit union means that you are helping to invest in the future of your local community. You’re also playing a part in strengthening cultural centres, sports teams, educational facilities, hospitals, and other places that your credit union partners with.
If you have a mortgage with a credit union that has a profit-sharing or dividend program, you will either receive a dividend based on the number of membership shares that you have or receive profit-sharing based on the balance of your accounts. The bright side to having a large mortgage balance, besides the negative of having a large balance, is that profit-sharing will be based on the total interest that you have paid every year. You’ll get an annual rebate on your interest paid, and so this will reduce the cost of your mortgage on top of the already low credit union mortgage rates.
The alternative to banks and credit unions are B lenders and private lenders. These are usually monoline lenders, which mean that they offer only one type of credit. In this case, they only offer mortgages. This differs from a credit union, as credit unions often offer a wide range of products and services, including chequing and savings accounts, credit cards, insurance, and investing accounts.
With a credit union, you’re able to keep all of your banking in one place, rather than have to worry about a mortgage floating around at another lender. This convenience is coupled with the lower fees that credit unions have compared to the banks. Matching your mortgage with a bank account that has no monthly fees and a wide network of no-fee ATMs makes a credit union mortgage an especially attractive place to bank at.
On the other hand, B lenders and private lenders can be slightly more accommodating towards borrowers with less than fair credit scores or income who are looking for a bad credit mortgage. B lenders also usually have higher mortgage rates to compensate their riskier borrowers.
Is a credit union right for me?
Buying a home is perhaps the largest purchase that Canadians will make in their lives, and so it’s not a surprise that they first turn towards the major banks when they are looking for a mortgage. They want to get a mortgage with a trusted name that they are familiar with. While credit unions might not always be the first thought that comes to mind when thinking of places to get a mortgage, credit unions are just as safe as getting a mortgage from a bank.
If you value having a physical branch location, many credit unions have plenty of branches for you to do your banking at. Your deposits at a credit union are usually still insured by your provincial provider, and credit unions are still regulated by the government. Credit unions also typically get top scores for customer service, as credit unions treat all members as part-owners.
Summary
Credit unions are not just an alternative to the big banks, but they’re increasingly becoming the top choice for homeowners looking to get a mortgage in Canada. Changes in the mortgage stress test are pushing borrowers away from the strict rules and policies that banks have and towards credit unions which are more flexible and understanding of the financial needs of Canadians.
Credit union mortgage rates are often lower than rates by the major banks, while dividends and profit-sharing reward you for being a credit union member. Making full use of lower banking fees at a credit union and their extensive shared ATM networks also makes banking at a credit union just as convenient as it would with other lenders. If you’re not able to pass the new mortgage stress test, if you don’t have an excellent credit score, or if you’re looking to get a lower mortgage rate, then a mortgage from a credit union is the way to go.