Big Bank vs Monoline Lender Mortgage in Canada

A monoline lender does one thing: mortgages. It has no branches, no chequing accounts and no credit cards, and it reaches borrowers through mortgage brokers. The big banks offer mortgages as one product among many and sell them through branches, their own mortgage specialists and online; the wider choice between a broker, a bank and an online platform is compared in the digital mortgage comparison. This page explains what monolines are, lists the main ones, and compares the two on rate, penalties, prepayment privileges, products and service. It is part of our guides to choosing a lender or broker.

What a monoline lender is

CMHC defines a mortgage finance corporation, the formal name for a monoline, as “a non-bank mortgage lender type that only offers mortgage loan products (that is, they are non-depository) and are usually only accessible via brokerages.” Because monolines don’t take deposits, they fund their loans by selling them to investors, largely through CMHC’s securitization programs; CMHC notes that mortgage finance companies “rely on CMHC securitization programs and therefore operate according to CMHC standards.”

The big banks are covered one by one in the roundup of the best mortgage lenders in Canada, and the full range of lender types, from banks to private lenders, is laid out in the overview of types of mortgage lenders.

Major monoline lenders in Canada

Monoline mortgages are prime (A-lender) products. Lenders that serve borrowers outside bank criteria, such as trust companies, are B-lenders and are compared in the B-lender roundup.

Why monoline rates are often lower

The rate gap comes from how the two business models are built:

1. No branches. A monoline doesn’t carry the rent, staff and systems of a branch network.
2. No cross-selling. A bank can accept a thinner mortgage margin because it expects to earn on chequing, cards and investments; a monoline has to win on the mortgage alone, so its rate and terms are what it competes on.
3. Securitization funding. Selling insured mortgages into CMHC’s programs gives monolines access to low-cost funding.
4. Broker distribution. Monolines pay brokers for each funded mortgage instead of running retail sales teams. How that compensation works is explained in how mortgage brokers get paid.

Banks start from a published posted rate and discount from it, and a borrower who asks often gets a lower offer; the tactics for that are in negotiating your mortgage rate. Rates change weekly, so they aren’t listed here: the current mortgage rates page compares lenders and terms.

What a rate gap is worth

Penalties: the method varies by lender

Breaking a fixed-rate mortgage early, to sell, refinance or move to a lower rate, costs a prepayment penalty at either kind of lender. The rule is the same:

The difference lies in the comparison rate used for the interest rate differential (IRD). FCAC explains the choices lenders have:

Two methods are common. One takes today’s posted rate for the remaining term and subtracts the discount you received when you signed; because posted rates sit above the rates borrowers actually pay, that can give a low comparison rate and a wide differential. The other compares your rate with the rate the lender currently offers for the remaining term. A lender, bank or monoline, can use either, so the size of a penalty depends on the lender and your contract rather than on the type of lender. Your own contract states the method.

The exact steps, the Interest Act limit after five years and how to get a binding figure from your lender are in how mortgage penalties are calculated, and the mortgage penalty calculator runs the numbers for your balance. Variable rates work differently. On a closed variable-rate mortgage the penalty is typically 3 months' interest.

Prepayment privileges

Prepayment privileges let you pay extra each year without a penalty, usually as an annual lump sum (a percentage of the original amount) and a payment increase. They vary by lender and by product within a lender: some bank mortgages allow less than a typical monoline mortgage and some allow more, and discounted “no-frills” products at either kind of lender often cut the privileges. The per-lender figures are in the lender roundup, and how the limits work is covered in prepayment privileges.

Standard charge vs collateral charge

Most monolines register a mortgage as a standard charge for the amount borrowed, while some banks (TD and Tangerine, for example) register every mortgage as a collateral charge, which can be registered for more than you borrow so a line of credit can sit under the same charge. A standard-charge mortgage can usually be moved to a new lender at renewal by assignment, which is simpler and cheaper than the discharge and new registration a collateral charge needs. The comparison of a collateral charge vs a conventional mortgage covers the trade-off, and switching mortgage lenders explains the move itself.

Feature-by-feature comparison

When a bank can suit better

• A home equity line of credit with the mortgage. Banks make it easy to combine a mortgage and a HELOC in a readvanceable plan, which strategies such as the Smith Manoeuvre need. Most monolines don’t offer this.
• Cash back on closing. Several banks offer cash-back mortgages that pay a percentage of the loan at closing, which can help with closing costs; the rate and repayment conditions attached to the cash are part of the comparison.
• A wider banking relationship. Clients with investments or business banking at a bank may be offered relationship pricing.
• Newcomer programs. Banks run dedicated programs for newcomers; mortgages for newcomers compares them.
• Branch service. Some borrowers want a local mortgage specialist they can meet in person.

When a monoline can suit better

• The rate is the priority. Monolines compete on rate for prime borrowers, and a broker can compare several at once.
• There is a chance of breaking the mortgage early. Selling, refinancing or a separation part-way through a term makes the penalty method matter more than a small rate difference.
• Shopping at renewal. A standard charge makes moving to another lender at renewal simpler. Renewal offers still vary, so comparing the renewal offer with the market is worthwhile; the mortgage renewal guide covers how.
• No need for branch access. Payments, prepayments and changes are handled by phone and online.

Common misconceptions

Related pages

• Best Mortgage Lenders in Canada
• Types of Mortgage Lenders in Canada
• Best Mortgage Lenders for First-Time Buyers
• Mortgage Penalty Calculator
• Fixed vs Variable Rate Mortgages