Banks and Credit unions are often grouped together into one category under “financial institutions”. While they may have several similarities in terms of financial service offerings, and or brick or mortar, in the world of mortgages the banks and credit unions have very little in common. As mortgage consultants, brokers and professionals, we work with both of them and are well versed in the differences between the two. To start with, we will first need to look at the definition of each institution.
A BANK
A bank is a financial institution that accepts deposits, lends money and transfers funds. They are listed as public, licensed corporations and have declared earnings that are paid to stockholders. A key point: they are regulated by the federal government-Office of the Superintendent of Financial Institutions.
A CREDIT UNION
Credit unions also deposit, lend and transfer funds. However, after that, we run into some differences between the two. Credit Unions have an elected Board of Directors that consist of elected members from their community. They are local and community-based organizations and unlike the banks, they are not federally but Provincially regulated.
Now that we have to clear definitions, we are going to focus on just one of the differences between the two: Who they are regulated by. Credit Unions are not regulated by OSFI therefore, they are not always subject to the mortgage lending rules imposed by the federal government (at least not right away). Take for example the recent changes to the B-20 guidelines. Since Credit Unions are not classified as a Federally Regulated Institution, they currently do not need to comply with the implications listed in the new rule changes. What does this mean for the consumer? Let’s walk through an example.
Say you have a dual income family with a combined annual income of $85,000. The current value of their home is listed at $700,000 and they have a mortgage balance of $415,000. Lenders have agreed to refinance to a maximum amount of 80% LTV (loan to value). That gives us a total of $560,000 minus the existing mortgage and you have $145,000 available provided you qualify to borrow it.
Now let’s put the Bank and the Credit Union toe-to-toe:
Difference between Bank and Credit Union when Refinancing
That means you are able to qualify for $105,000 LESS with the bank when refinancing!
Take the same scenario listed above and let’s apply it to purchasing:
Difference between Bank and Credit Union when Purchasing a Home
Again, you have a reduced amount of $105,000 towards the purchase of your new home.
A few disadvantages to Credit Unions that you should be aware of:
You cannot port your mortgage out of province
With the introduction of the new B-20 guidelines, there has been an increased demand for Credit Unions. This increasing demand has led to higher rates and sometimes these are not the most competitive for the client. Working with a broker can ensure that you receive the best rate and product for your situation.
Credit Unions also have a typically lower debt qualification ratio for how much house you can afford and how much debt you can carry
With those considerations, there are limitations to what Credit Unions are able to offer you. As always, working with a Dominion Lending Centres Mortgage Professional is one of the best ways to ensure you are not only getting the sharpest rate, but also the best product for you and your unique situation. Give us a call today-we would love to talk to you about your options and how we can help you.