While first-time urban home buyers are signing with biggest bank, more rural first-time home buyers opting for non-bank lenders

An urban-rural mortgage divide has emerged among first-time home buyers, with urban buyers largely going with Canada’s biggest banks while small-town and rural buyers increasingly more likely to sign with other lenders.

 

Data from real estate intelligence platform Teranet looking at Ontario first-time buyers’ mortgage providers from 2011 up to the first half of this year found that at the beginning of the last decade there was very little difference between urban and rural buyers’ mortgage choices: 65 per cent of urban buyers in Ontario and 62 per cent of the province’s small-town and rural buyers went with a Big Five bank.

 

But in the intervening years, a gulf appeared, and widened. On average, just half of small-town and rural buyers have gone with a Big Five, dropping to a low of 48 per cent in 2023 before rebounding to 55 per cent in the first half of 2024. The remainder went with another lender, such as a credit union, smaller bank or a monoline lender – an institution that offers mortgages but not any other financial products, such as bank accounts.

 

In contrast, roughly 60 to 65 per cent of urban buyers – such as those from the GTA, Ottawa, London and Waterloo – on average have gotten their first mortgage with a Big Five, soaring to 71 per cent in the first half of this year.

 

Financial industry experts say the difference between urban and rural buyers could be caused by a combination of factors, including the financial institutions available in small communities, major banks’ approach to homes in rural regions and the competitiveness of monoline lenders in the insured mortgage space. While the Teranet data was specific to Ontario, they say these factors are applicable nationwide.

 

The divide stands out in a year that has seen the major banks get aggressive to maintain their mortgage market shares in a slumping housing market. Royal Bank of Canada chief executive officer Dave McKay called the market “ruthlessly competitive” at a conference in September, and said the banks were absorbing customers’ desire for lower rates, cutting into their profit margins.

Over all, the majority of Canadians still get their mortgage from a bank. And generally speaking, when comparing a Big Five or Big Six bank to a credit union, “most of the time a well-qualified borrower is going to get a better deal with a Big Five,” said Robert McLister, an interest rate analyst and mortgage strategist with MortgageLogic News.

 

That was the case for Richard Clark and his wife Hayley Chazan, who recently bought their “dream home” in Portuguese Cove, a small rural community 25 minutes outside of Halifax, which will bring them closer to Mr. Clark’s family. The couple moved from Toronto in November.

 

Mr. Clark said when they put in the offer they hadn’t yet been preapproved for a mortgage but were “pretty confident. We had good credit and enough money saved for a down payment.” Their realtor put them in touch with a mortgage broker, who said their best offer was from one of the Big Five banks, with the condition that the couple set up a bank account from which they’ll pay their mortgage.

 

But in smaller markets, borrowers often do need more flexible underwriting for a variety of reasons, Mr. McLister said. That can be related to the property itself and its location, the borrower’s down payment, their debt service ratio or another factor.

 

“If you need more debt ratio flexibility to qualify, or you want a better loan to value, you might not be able to get that from a big bank,” he said. “You might need to use a more specialized lender. And in that case, for the little extra you pay on the rate, you’ll get potentially a lot more flexibility.”

 

Credit unions and non-bank lenders specialize in that flexibility, he said. Credit unions in particular are known for being more open to rural-zoned properties and taking more risk in their local markets, because they know them well.

 

Banks, meanwhile, tend to “shy away” from harder-to-market rural properties, said David McVay, a banking industry consultant and founder of McVay and Associates. “Rural properties are more difficult to underwrite than urban, because their marketability is much less. You can sell a property in an urban market within days sometimes, whereas rural properties can take quite some time because there’s not the turnover or demand.”

 

Mr. McVay’s company produces reports on the personal banking market and on credit unions specifically. He pegged banks’ share of the mortgage market nationally at 77 per cent, with credit unions – including Desjardins, a major player in Quebec – at 13.3 per cent, and other lenders at 10 per cent. Clients of credit unions and other lenders tend to come primarily from smaller and rural markets, he said.

 

Convenience could be another factor, said Alex Leduc, founder and chief executive officer of online mortgage brokerage Perch in Ajax, Ont. Bank branches are generally less available in smaller communities, while credit unions are more common; first-time buyers in those markets may go with what’s familiar. Small-town and rural buyers are also less likely to see bank advertising, he said.

David Larock, a Toronto-based mortgage broker, said he doesn’t think the data indicate banks aren’t paying enough attention to smaller towns, but that the urban-rural divide likely comes down to mortgage insurance.

 

Mortgage insurance is either buyer-paid, when the buyer is putting down a deposit of less than 20 per cent, or lender-paid. In the latter case, the lender can choose to add insurance to properties where the buyer is putting down more than 20 per cent. For lenders who securitize their mortgages into the Canada mortgage bond program in order to fund them, which includes monoline lenders such as First National and MCAP, mortgage insurance allows the lender to offer more aggressive rates by lowering the mortgage’s risk.

 

Since 2017, properties with purchase prices of $1-million or more are no longer eligible for default insurance, which he said has made monoline lenders less competitive in the uninsured space. While people buying in a major city are much more likely to be paying more than $1-million, a greater percentage of rural and small-town buyers are eligible for default-insured mortgage rates given the lower property values in those markets.

 

“The reality is … monoline lenders can’t compete in the uninsured mortgage space,” he said. “That’s restricting options for people buying the most expensive properties and taking on the largest mortgages.”

 

 

 

This article was first reported by The Globe and Mail