Hello! Welcome to a quick lesson on the ABC’s of Lending.
Growing up, all I knew were the usual suspects when it came to banks. Canada’s Big Five Banks: Toronto Dominion (TD), Royal Bank of Canada (RBC), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce (CIBC).
I remember my mom taking me to open my first account at Toronto Dominion (TD). They gave me and my sister this little children’s bank book, that we would get stamped and updated each time we deposited money into the account.
We loved it! So exciting having our own account. Ever since then, I was always “banking” with TD.
Once I began to learn more about the finance world, specifically with real estate and investments, I understand more about how the different banks operate, and the types of services they offer.
ABC’s OF LENDING
I am sure you’ve heard it before. A lender, B lender…Maybe even C lenders. Some simple ways to distinguish between the different lenders are:
A LENDER – Traditional Banks
1) Been around for a long time
2) Offer traditional style of banking with in-person customer service, online services and specialized advisors to help guide you to the right kind of investment or account with their bank
3) Governed by Federal guidelines – Think STRESS TEST! You must be able to qualify for a mortgage at the 5 year average posted rate OR 2% higher than what the bank is offering
B LENDER – Non Traditional Mortgage Lenders
1) Been around for a while, but as of recently are becoming more competitive in the mortgage world
2) May not have the option to hold a bank account with a B Lender, but they offer mortgage financing and additional types of investing
3) Offer a range of products to clients who require “creative” financing solutions
4) Governed by Provincial guidelines, which allows for more flexibility when offering mortgage products
C LENDER – Private Lenders
1) Anyone, really!
2) Private lenders will lend their own money to clients for a mortgage, at a higher rate than the A’s and B’s – secured by the asset the client is buying
3) Private lenders are useful when clients need financing solutions, but they are not able to meet the requirements of the A’s and B’s
4) Will hold a 2nd mortgage on the property for a shorter period of time, until the clients are able to secure financing with another bank
The difference between the ABC’s is that what they require from you as a client will vary, depending on the products they offer. For example:
If you are an A+ client with high credit, high income, low debt and the funds to buy the property you will be offered an A+ product, lengthy term, A+ interest rate
If you are a B+ client with pretty good credit, high income, high debt and the funds to buy the property, you will be offered a B+ product, A good product, a good interest rate
You are a B- client, who wants to buy an investment property but your debt is already high due to an existing mortgage where you live. The C Lenders (private lenders) will help you achieve that goal but you have to pay for it with additional fees and a higher interest rate
Try not to let that last one discourage you from buying your investment property. While the terms of the private loan may not be ideal, it’s only for a short period of time. And within a few years it is very likely the investment will have already gone up in value. I know from first hand experience! Also if it is an investment property, your tenant is helping you pay the mortgage.
So that’s about it. The basics on the ABC’s of Lending.
Having a Mortgage Agent help you with your real estate purchase is useful because they will present you with a variety of products being offered by ALL the lenders. It is especially useful if you need a bit of creative financing, to help you achieve your real estate investment goals.