The Various Sources of Mortgage Funds

When you think about who actually funds mortgages (ok, I’ll admit it’s not a question a lot of people ponder for more than a couple of minutes), you may be surprised to find that mortgages are actually funded by a variety of sources – from banks (the obvious one) to credit unions and mortgage loan companies to private investors.  When you’re looking for a mortgage on your own or with a bank, you’re usually only exposed to a couple of these options, but when using a mortgage broker, there are a variety of lending sources we can investigate to best suit your individual mortgage needs.  There are actually quite a few differences between what banks will fund versus credit unions and mortgage loan companies (usually referred to as “monoline lenders”).  Here’s a look at the various sources of mortgage funds, with a brief comment on what types of mortgages they will typically do:

• Chartered Banks – One of the most common sources for residential mortgages in Canada.  Banks (whether you get a mortgage directly from a branch or through a mortgage broker) usually prefer doing “clean” deals – meaning that they tend to stick to clients with good credit, salaried jobs, urban properties, etc.  They commonly deal with hi-ratio (less than 20% down) and conventional (more than 20% down) first and second mortgages.
• Trust Companies and Mortgage Loan Companies (Monoline Lenders) – While their market share has been shrinking over the past decade or so, trust companies and monoline lenders focus most, if not all, of their business on residential mortgages.  Like the banks, they also deal with hi-ratio and conventional first and second mortgages.  They tend to be a lot more flexible with whom they lend to (don’t have to have perfect credit, salaried job, etc), and to what types of properties they’ll deal with (cottages, farms, etc).
• Credit Unions – A growing segment in the world of residential mortgages (especially out in BC – though credit unions are certainly making a push here in Ontario right now as well).  They tend to only lend in areas where they have branches, but are known for having great customer service and competitive rates.  Like the banks and monoline lenders, they usually deal with hi-ratio and conventional first and second mortgages.
• Life Insurance Companies and Pension Funds – Traditionally deal with larger multi-residential and commercial mortgages, but are starting to move into single-family residential financing.  Most will usually do hi-ratio and conventional first mortgages, and some are even moving into conventional second mortgages.
• Finance Companies – Generally deal with hi-ratio and conventional first and second mortgages. Due to the higher costs of funds, finance companies tend to do most of their business in hi-ratio second mortgages (rates can be high, but they tend to lend to people that can’t get funds from more traditional sources listed above).
• Private Investors – Usually comprised of individual investors or groups on investors.  Private investors can and will do all types of mortgage financing (this is because private investors are usually not approved as CMHC lenders, and therefore do not grant insured mortgages).  If you can’t get a mortgage anywhere else, a private investor is your best bet.  Rates can be expensive, but sometimes it may be the only way to get a mortgage.
• Canada Mortgage and Housing Corporation (CMHC) – While best known for providing mortgage insurance for hi-ratio mortgage in Canada, CMHC occasionally becomes involved in the direct lending of mortgage funds.  With a mandate “to house Canadians,” CMHC will often participate in provincial and federal programs designed to stimulate the housing market or provide alternative types of accommodation (government housing, shelters, non-profit housing, co-operative initiatives, etc).
• Vendor Take Back (VTB) – Although not as common as it used to be, vendor take backs are actually a form of private investing designed to facilitate the sale of a property (usually for properties that would otherwise be hard to mortgage like rural farms or properties with unique structures).  Mortgages are frequently sold to third parties (an investment group) or maintained for investment purposes.