In Canada, the financial services landscape is dominated by the ‘Big Five’ banks comprised of the Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank) and the Canadian Imperial Bank of Commerce (CIBC). In addition to these banks, there are other players as well. Those other lenders include Manulif Bank, National Bank, DUCA Credit Union, Community Trust, Equitable Bank, NPX, Merix, B2B Bank, Home Trust, Haven Tree Bank, CMLS Financial, CWB (Optimum - Canadian Western Bank), CMI, Fisgard, and many others that are also able to offer mortgages.
One of the lesser known financial institution types is the credit union. The reason that credit unions are not as well-known as the bigger banks is simply due to the sheer concentration of mortgage market share in Canada held by the Big 5. A whopping 72% of all mortgages outstanding as of 2019 are held by the major five banks in Canada as per statistics sourced from the Canada Mortgage and Housing Corporation (CMHC).
Despite their lower prevalence though, credit unions such as DUCA and First Ontario Credit Union have quietly operated for over 100 years in Canada. Currently, it is estimated that there are 700 credit unions spread across the country. We will discuss why it may be worth adding your local credit union to your consideration list when obtaining a mortgage refinance or new mortgage.
Before we move further, it is pertinent to describe a credit union and how it differs to a bank such as RBC or TD, for example. As financial institutions, credit unions offer a similar breadth of services as a chartered bank. However, the difference is that a credit union is owned by its members (customers) and are non-profit organizations for the most part. They exist to provide benefits to the members that own them and so any excess profit generated is either invested back, paid out as dividends, or donated out.
In Canada, credit unions are regulated at a provincial level and either Provincial corporations or non-government insurers insure deposits made into the organization and are able to offer mortgages to borrowers who would not pass the current mortgage stress test. Yes, they can approve a mortgage application without a stress test.
Recently, new legislations passed have allowed credit unions to grow and become federally chartered. However, they still remain member-owned.
There are several advantages of a credit union mortgage as opposed to a large, federally regulated bank. We have picked out a few below:
1. Easier approval processes
All other things equal, credit unions are more likely to lend to someone with a less than optimal credit score and/or history. This is primarily because credit unions hold the loans that they originate whereas banks often take mortgages off their own books by selling them to outside investors. As such, these investors are often the ones that influence the interest rate charged as well as underwriting standards. This means that banks will typically have far less power to be flexible with their lending in terms of the rates offered and who they can lend to.
2. Reduced rates
This member-focused mandate further helps mortgage borrowers to secure lower rates on their mortgages. Credit unions are largely designed to break even on their costs and are not taxed at a federal level. Do not underestimate the power of a difference of even a few basis points on your mortgage! Collectively, over the life of a loan, this can equal hundreds or even thousands of dollars in savings.
3. Customer service
At a credit union, loan officers generally have a smaller portfolio of clients than banks. This enables a more personalized experience when originating a new mortgage. In unprecedented events like the COVID-19 pandemic, credit unions are also more likely to offer relief on principal and interest repayments or other forms of financial support to their customer members.
4. No Mortgage Stress Test
That’s right! Credit Unions have the ability to approve a mortgage application without the need for a mortgage stress test. This does come with a slightly higher interest rate, but it still tends to be a lower interest rate than you would get from a trust company or a private mortgage lender.
However, despite the upsides of obtaining a mortgage from a credit union, there are some downsides that have to be kept in mind as well.
In general, a Big 5 bank and other lending institution will open an account for anyone who qualifies for it. A credit union on the other hand may impose additional requirements and/or limitations that constrict the amount of people who can sign up to be a member. If a prospective client does not meet these membership criteria (which may vary between different credit unions), they cannot secure a mortgage from the credit union even if it is a better transaction on paper.
2. Sparser geographic base
Most credit unions tend to be locally-focused which means that there are not nearly as many branches as a national bank would have. With a federal bank, you can go across the country and likely still be able to walk into a branch of the bank who can assist you with your mortgage-related query. With a credit union, your options are a lot more limited in that regard.
In the digital age, more consumers are transitioning to online banking to service their day-to-day needs. The large banks have defined technology investment plans and deploy hundreds of millions of dollars each year to optimize their service offerings online. Credit unions do not have the same resources. As a borrower, this means that you might not always be able to do something at the tap of a finger or download a comprehensive app that replicates the functions of an in-person meeting.
4. Limitations on lending
At their core, banks and credit unions operate in the same fashion. Deposits are taken from customers and lent out as mortgages or personal loans. Therefore, for an institution to be able to lend out a loan, it must have a sufficient amount of deposits to make that loan. A chartered bank can have billions in deposits while a credit union tends to be significantly smaller in that regard. Thus, if there aren’t enough deposits to cover new loans, the credit union may stop lending for a period of time until they have access to more funds again.
Keeping these merits and considerations in mind, be sure to evaluate whether a credit union may be the right option for you when you go mortgage-hunting!