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Canadians are known for their polite and passive nature. It’s no surprise, then, to see Canadian homeowners lagging compared to their global peers when it comes to switching mortgage providers or even doing the research on the best online mortgage lenders to see whether they can get a better deal elsewhere.
According to an HSBC global survey, just 39% of Canadian homeowners had ever switched mortgage lenders, compared to 53% of their American counterparts and 44% overall. Only half of Canadian respondents said they have even looked to see if they can get a better deal by switching mortgage providers, compared to 61% globally.
Despite the massive shift towards online mortgage lending, it seems many Canadian homeowners and prospective buyers still take a traditional path with their big bank – even signing on to renew with their bank’s first offer rather than shopping around to compare interest rates.
I’ll admit in my two-decades of homeownership, I’ve largely stuck with a traditional brick-and-mortar lender or a big bank. But as online mortgage lending grows and interest rates become more competitive, I’m warming to the idea of making the switch.
What Are the Best Online Mortgage Lenders?
I checked each of the big four comparison sites and used the criteria of a prospective homebuyer in Ontario looking to purchase a $400,000 home with 15% down for a total mortgage of $340,000. I searched for a 2-year fixed rate mortgage with no restrictions in terms of rate holds, pre-approvals, or pre-payments.
Here’s what I found for the best online mortgage lenders for a 2-year fixed rate closed mortgage in Ontario for July 25, 2019:
|Lender||Rate||Held Until||Allowable Pre-payments**||More Info|
|motusbank*||2.49%||Oct 23, 2019||20% / 20%||Learn More|
|Meridian||2.49%||Oct 23, 2019||20% / 20%||Learn More|
|Butler Mortgage||2.64%||Nov 22, 2019||20% / 20%||Learn More|
|Tangerine||2.64%||Nov 22, 2019||25% / 25%||Learn More|
|Sigma Mortgage||2.69%||Nov 22, 2019||15% / 100%||Learn More|
|HSBC||2.79%||Nov 22, 2019||20% / 20%||Learn More|
*Disclaimer: This offer is not available for residents of Quebec.
**The amount you can prepay in a lump sum each year without penalty / The amount you can optionally increase your payments by each year.
Interestingly, the best online mortgage options in terms of the lowest rates come from motusbank and its parent company, Meridian Credit Union at 2.49%. Meridian launched motusbank as its digital arm in early 2019 and it has quickly gained traction in mortgage lending with market-leading interest rates.
Should You Apply for an Online Mortgage?
The ideal candidate for an online mortgage is a well-qualified, rate-sensitive shopper with pretty basic mortgage needs. In other words, the majority of homeowners and potential homebuyers.
The search should begin with a rate comparison site. You can find the lowest mortgage rates available in your province, and search by fixed or variable rates and terms from 1-10 years.
Note that if you frequent these comparison sites, you’ll notice the best mortgage rates tend to come from online brokers such as Butler Mortgage, True North Mortgage, intelliMortgage, and Sigma Mortgage. Their rates are often substantially lower than those offered by the big banks, but the downside is you might end up with a mortgage from a non-traditional lender such as MCAP, Street Capital, First National, or Bridgewater Bank. This is not necessarily bad – but some borrowers simply feel more comfortable knowing their mortgage is held at a big bank.
If you’re struggling to make a decision and don’t have time for a ton of research, let us offer our two cents. For an online bank, motusbank is our top choice, as their mortgage interest rates are crazy-good and you can do the entire application online in under 10 minutes.
For a credit union, consider Meridian: they have some phenomenal fixed and variable rate mortgages, as well as plenty of mortgage options. What’s great is that they have more flexibility than traditional banks when it comes to the mortgages they offer and approve. You’re not automatically disqualified if you don’t pass the stress test, as it’s just one factor used to help figure out whether a mortgage is a good fit for a borrower. They consider lots of other things, such as income appreciation, accelerated payment options, and overall principal reduction. If you’re stressed about the stress test, a credit union like Meridian might be a good solution – they’ll work with you to find flexible solutions and make it easier to get financing for your dream home. Plus their fixed and variable rate mortgages are pretty awesome: Meridian's 5-year, closed fixed-rate mortgage is phenomenal at 2.82%, but they also offer a 5-year, closed variable rate mortgage at 2.90%.
Tips for Finding the Best Online Mortgage Lenders
Typically, the main objective of a borrower is to minimize overall costs. However, that does not necessarily mean choosing the lowest interest rate. Penalties, fees and rate surcharges can easily offset a small difference in lender rates.
Penalties can apply if you break your mortgage before the term is up, like if you need to sell or refinance your home. Some lenders have prepayment charges as high as 3% of your principal – a steep price to pay to break your mortgage.
Other “no frills” mortgages might restrict you from refinancing with any other lender before maturity, while others might prevent you from increasing your mortgage before maturity without a penalty – a term known as “blend and increase.”
Watch for these “gotcha’s” and more when searching for an online mortgage. Read the fine print and pop-up notifications to make sure you understand all of the terms and restrictions before you sign up.
Finally, look for favourable pre-payment terms that align with how you want to pay off your mortgage. A standard is to allow you to prepay 15 – 20% in a lump sum each year and/or increase your payments by as much. This is important especially as you get closer to paying off your mortgage in full.
How the Online Mortgage Application Process Works
I figured that an online mortgage application would be fairly straightforward. To be sure, I went through the process and filled out an application online with motusbank.
I first had to build a profile by entering some personal information such as my name, phone number, current address, email address and birthday.
In my case I selected, “switch my mortgage to motusbank” and then entered the value of my property, estimated monthly property taxes, and the date on which financing was required.
The rest of the application was as straightforward as applying for a credit card online. Employment information, income, and a list of assets. After some legal disclaimers and a summary, I was ready to move on to the next step – verifying all of that information by scanning and uploading paystubs, T4s, mortgage statements, and property tax statements.
The entire online mortgage application process took less than 10 minutes. It’s that easy! Once all of your information is verified and your application is processed, your mortgage lender contacts you with the next steps.
Use an Online Mortgage Calculator
An online mortgage calculator is a good place to start to determine how much you can afford to spend on a home. You can use a number of variables, including your income, down payment, property taxes, and debt payments to help you work out a budget. Rate Hub’s affordability calculator is a good resource to figure out how much you can afford.
For existing homeowners, there are refinancing calculators available online at most banks to help you determine how much equity you can access from your home with a refinanced mortgage. Tangerine has a useful online mortgage calculator that includes refinancing as an option.
Can I Get a Mortgage Pre-Approval Online?
Before you go through the mortgage application process, it’s a good idea to pre-qualify or get pre-approved ahead of time so you can establish the mortgage amount you may qualify for. Pre-approval means that a lender has stated in writing that you qualify for a mortgage loan based on your current income and credit history. Pre-approval can also guarantee the interest rate for up to 120 days, provided your financial situation doesn't change.
A mortgage pre-approval signals to sellers and real estate agents that you're a serious buyer, which can give you negotiation leverage, especially during a bidding war. You’ll have the ability to move fast to close the deal and finalize your mortgage.
You can get a mortgage pre-approval online through most banks, credit unions, and online lenders with no impact to your credit score.
Down Payment Rules and Mortgage Stress Test
If you’re buying a house in Canada, you’ll need to put down a minimum of 5% of the purchase price of the home to qualify. Anything less than a 20% down payment is called a “high-ratio” mortgage, which falls under CMHC mortgage default insurance and the borrower must pay extra fees – with insurance premium rates ranging from 1.80% to 4.00% of your total mortgage amount.
Homebuyers with a down payment of 20% or more have an uninsured mortgage. They avoid the hefty CMHC fees, but as of January 2018 are now subject to stricter qualifying criteria. This so-called stress test is used to determine whether a homebuyer would be able to afford their payments should interest rates increase. Basically, the borrower must be able to qualify at either the 5-year benchmark rate published by the Bank of Canada or the customer's mortgage interest rate plus 2% – whichever is the higher.
Pros and Cons of Getting a Mortgage Online
An online mortgage isn’t for everyone, but generally speaking, if you have stable employment, easily verifiable income, and a good credit score (700 or better), then it’s worth a look. If you’re self-employed, work on commission, have a poor credit history, or some other unusual circumstances then it’s best to go with a traditional mortgage broker.
The advantage of getting an online mortgage is it empowers the individual homeowner or homebuyer to be his or her own mortgage broker. You’re doing the research, finding the lowest interest rates, and identifying the most favourable terms that suit your own situation. There’s no potential conflict of interest or feeling that you’re not being given all the appropriate information. It’s right there for you to see. On the flip-side, you need to be comfortable doing your own research and know the terms and conditions you’re looking for in a mortgage. If you mess up, there’s no one to blame but yourself.
A conventional mortgage broker works on your behalf to find you the best mortgage. The advantage is that they have access to a wider range of lenders than just one bank. A broker can be helpful and almost necessary for those with poor credit or income that is not easily verifiable.
On the downside, a broker is paid by the lender and may not have the homebuyer’s best interest at heart (for example: if they receive an incentive to refer one lender over another).
Finally, you can get a mortgage at your bank or credit union. The upside here is that you might have a long-standing relationship with your bank, or more specifically with an advisor at your bank who knows your history inside and out. It might be more convenient to have all of your banking – including your mortgage – in just one place.
The cons of getting a mortgage at your bank is that you’re likely not getting the best interest rate on the market by dealing with just one lender. Heck, your bank might even be offering better rates to other online mortgage shoppers rather than to the customer sitting across the desk.
Online mortgage lending has democratized the lending industry and put knowledge and power into the hands of everyday Canadian homebuyers. With interest rates and mortgage terms at our fingertips, (thanks to online comparison sites), homeowners and prospective buyers can apply for a mortgage without leaving their couch.
The widespread availability of information has fostered a more competitive rate environment that is no longer dominated by Canada’s big five banks. Now, the best online mortgage lenders are offering rates up to 50 basis points lower than the big banks, helping customers save on one of the biggest expenses of their lives.
In the mortgage lending world, a wealth of options is a great problem to have. As long as you’ve done your homework and crunched the numbers, you’ll be good to go in no time.
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