Interest rate plays a leading role for Homebuyers when purchasing a home. However, the lower interest rates, at times, are offered by non-bank institutions which most people are foreign with. We often get clients who had done they’re own rate shopping online but were uneasy since it was an unknown lender offering them such a good rate and they were not confident enough to move forward without expert advice. As a mortgage broker, we also deal with non-bank lenders due to their specialized mortgage products and it remains our responsibility to let you know key information on what sets these two types apart.

What are the key differences between Bank and Non-Bank Lending

ORGANIZATIONAL STRUCTURE
– Banks are financial institutions that are authorized to accept deposits from the public and lend money. They are typically highly regulated and have a range of financial services, including savings and checking accounts, loans, mortgages, and investment services.

– Non-bank lenders are financial institutions that provide lending services but do not hold banking licenses or accept deposits. They may include mortgage lenders and finance companies. Non-bank lenders often specialize in certain types of loans, such as personal loans, business loans, or mortgage products.

ACCESS TO FUNDING
– Banks typically have access to a stable source of funding through customer deposits, which they can use to fund their lending activities.  They may also raise funds through capital markets and other financial
instruments.

– Non-bank lenders may rely on various sources of funding, including institutional investors, securitization, and peer-to-peer lending platforms. They may not have access to deposit funding but may have more flexibility in sourcing capital from alternative sources.

Key Advantages of Bank Mortgages

REGULATORY OVERSIGHT: Banks are subject to strict regulatory oversight, which can provide borrowers with a sense of security knowing that their lender is closely monitored by government agencies. This oversight can help ensure fair lending practices and consumer protection.

DEPOSIT INSURANCE: Bank deposits are typically insured up to a certain limit. This insurance provides protection to depositors in the event of bank failure, which can increase confidence in the banking system and make bank mortgages seem less risky to borrowers.

VARIETY OF SERVICES: Banks offer a wide range of financial services beyond mortgages, such as savings accounts, checking accounts, investment products, and insurance. Borrowers may find it convenient to have all their financial needs serviced by one institution.

Key Disadvantages of Bank Mortgages

STRINGENT REQUIREMENTS: Banks often have strict eligibility criteria for mortgage loans, including credit score requirements, income verification, and down payment requirements. This can make it difficult for some borrowers, particularly those with less-than-perfect credit or irregular income, to qualify for a bank mortgage.

SLOW APPROVAL PROCESS: The approval process for bank mortgages can be lengthy and bureaucratic, involving extensive documentation and review. This can result in delays for borrowers who need to secure financing quickly.

LIMITED FLEXIBILITY: Banks may have limited flexibility in terms of loan terms and conditions, as they must adhere to regulatory guidelines and internal lending policies. Borrowers looking for specialized or non-standard mortgage products may find it challenging to obtain them from traditional banks.

Key Advantages of Non-bank Mortgages

FLEXIBLE ELIGIBILITY: Non-bank lenders often have more flexible eligibility criteria compared to banks, which can make it easier for borrowers with unique financial situations to qualify for a mortgage. Non-bank lenders may be more willing to consider factors such as alternative credit histories or non-traditional sources of income.

QUICK APPROVAL PROCESS: Non-bank lenders may offer faster approval processes compared to banks, as they may have streamlined underwriting procedures and less bureaucratic overhead. This can be advantageous for borrowers who need to secure financing quickly.

SPECIALIZED PRODUCTS: Non-bank lenders may specialize in certain types of mortgages or cater to specific borrower segments, such as self-employed individuals, investors, or borrowers with less-than-perfect credit. This specialization can result in tailored mortgage products and services that meet the unique needs of borrowers.

Key Disadvantages of Non-bank Mortgages

VOLATILE INTEREST RATES: Interest rates for non-bank mortgages fluctuate erratically as it is often influenced by the investors providing funds to back the mortgages or of current market bond rates. Because they rely on external funding, they have little control over pricing.

LESS REGULATORY OVERSIGHT: Non-bank lenders may be subject to less regulatory oversight compared to banks, which can increase the risk of predatory lending practices or inadequate consumer protection measures. Borrowers need to exercise caution and carefully review the terms and conditions of non-bank mortgages.

LIMITED SERVICES: Non-bank lenders typically focus on lending activities and may not offer the same range of financial services as banks. Borrowers who value the convenience of having all their financial needs serviced by one institution may find non-bank lenders lacking in this regard.

An informed buyer not only does their homework but also confer with an expert before making a final decision. Be an informed buyer and contact Joe Purewal today!