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decoding the mortgage market

Mortgage lenders come in all sizes, ranging from RBC – the biggest in the country – to tiny wholesale lenders and credit unions.

When it comes to entrusting a company with your biggest debt, odds are, name recognition matters to you. Consciously or subconsciously, people gravitate to well-known lenders partly because there's a feeling of safety in "big."

Even when a smaller lender has tantalizing rates and the best terms, homeowners sometimes tend to avoid it if they don't know the name. An oft-cited reason for that is fear that the lender will go out of business. And that is certainly not unprecedented.

If we're talking about "prime" lenders – i.e., those catering to more creditworthy customers – the list of extinct lenders includes companies like Abode Mortgage, Citizens Bank, Dundee Bank, Maple Trust and ResMor Trust. Mind you, most of these lenders were purchased by others.

Just recently, we buried another lender. FirstLine, once one of the biggest mortgage companies in the country, closed its doors Tuesday after 25 years in business.

People worry about lenders closing down for one main reason: they're scared the lender will force them to repay their mortgage early. In reality, however, that rarely happens with prime lenders.

The bigger risk has been with subprime lenders. In fact, some subprime borrowers have even lost their homes in cases where they couldn't refinance elsewhere after their lender shut down.

But if you're a qualified borrower with provable income, do you really need to be worried if your lender goes out of business?

"Not at all," says Boris Bozic, president and chief executive officer at Merix Financial.

"I always find it fascinating that people are concerned about smaller lenders," he adds. "We're not deposit takers. We're giving money, not taking money. The risk is all ours."

Many second- and third-tier lenders get their funding from large financial institutions and that funding is fairly stable, Mr. Bozic says.

"Even if a company were to run into financial difficulties, the vast majority of the time there are backup servicers in place." This sort of contingency planning is almost always required by the parties funding a lender's mortgages.

If a lender were to close, Mr. Bozic says another financial institution would simply take over the mortgage.

When a lender sells your mortgage to another party, you just keep making the same payments like nothing happened – albeit to a different company, in some cases. The new lender is generally required to honour the terms of your old mortgage contract, Mr. Bozic says.

The one thing that will change is the renewal offer you receive at maturity. Generally, the new owner of your mortgage will be the one making your renewal offer. That could be good or bad depending on how competitive the new lender is. But smart consumers always shop their lender's renewal offer anyway, so this isn't a major issue.

Overall, the probability of a lender disappearing is low. On its own, it's not enough reason to avoid a less prominent company.

That's especially true when the lender has the best deal in the market – which is the case with many smaller lenders today. If you can find a 0.10 percentage point lower rate, you'll save roughly $1,200 over 60 months on a standard $250,000 mortgage.

If you're interested in getting the best rate possible, you need to be open to saving money with a smaller mortgage company. Just be sure to get independent advice so you can sidestep the ones with onerous contract restrictions. Examples of those include fully closed terms, costly penalty calculations, porting restrictions, refinance limitations, and so on. Some lenders have rather unpleasant fine print, but that's true for micro and mega lenders alike.

There are certainly reasons to choose a major bank or large credit union for your mortgage, including branch accessibility, integrating your mortgage with your banking or credit line, and access to other financial products. But it's rarely necessary to shun lesser-known lenders for fear they'll close and leave you stranded.

Robert McLister is the editor of and a mortgage planner at Mortgage Architects. You can also follow him on twitter at@CdnMortgageNews.

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