Alternative Lenders and Mortgage Penalty Calculations

Alternative lenders represent a significant share of the Canadian mortgage market. Institutions such as First National, MCAP, Merix Financial (Lendwise), and Equitable Bank offer competitive mortgage products accessible exclusively through AMF-certified mortgage brokers in Quebec. Their approach to penalty calculation is often more favourable to borrowers, making them a strategic choice for those who anticipate the possibility of breaking their contract before the end of the term.

IRD Calculation at Alternative Lenders

The fundamental difference between alternative lenders and big banks lies in the interest rate differential (IRD) calculation method. Big banks frequently use their posted mortgage rate as the comparison benchmark. This posted rate is often marked up relative to the rate actually offered to the client, which artificially inflates the differential and therefore the penalty. Alternative lenders like First National and MCAP instead use the client's actual contract rate as the starting point for the calculation.

Interest Rate Differential (IRD)

A penalty calculation method based on the difference between the borrower's contract rate and the lender's current rate for a term matching the remaining duration. The result is multiplied by the mortgage balance and the number of months remaining in the term. The penalty is the greater of the IRD and 3 months' interest.

Concrete Comparative Example

Consider a borrower with a $300,000 balance, a contract rate of 4.50%, and 36 months remaining in the term. The current comparable rate for a 3-year term is 3.80%. At an alternative lender, the IRD would be calculated on the 0.70% spread (4.50% - 3.80%), producing approximately $6,300 ($300,000 x 0.70% x 36/12). At a big bank using a posted rate of 5.80%, the spread would become 2.00% (5.80% - 3.80%), producing an IRD of approximately $18,000. The difference is substantial and deserves consideration from the initial lender selection.

Profile of Each Alternative Lender

• First National: Canada's largest non-bank mortgage lender. Uses the contract rate for IRD. Offers fixed and variable terms with portability. Known for processing speed and transparency.
• MCAP: subsidiary of MCAP Financial Corporation, a major mortgage lender and servicer. Penalty calculation based on the contract rate. Wide range of products including variable rate options.
• Merix Financial (Lendwise): distributes products under the Lendwise brand through brokers. IRD calculation approach is generally more advantageous. Offers both conventional and insured products.
• Equitable Bank: federally chartered bank regulated by OSFI. Distinguished by programs for self-employed and non-traditional borrowers. CDIC member for deposit protection.

Regulation and Borrower Protection

Alternative lenders are subject to the same regulatory obligations as big banks regarding disclosure and consumer protection. In Quebec, the LDPSF (Act Respecting the Distribution of Financial Products and Services) governs the relationship between the broker and borrower. OSFI applies the same prudential guidelines (notably Guideline B-20 on residential mortgage underwriting practices) to federally regulated lenders, whether they are big banks or alternative lenders. The AMF supervises the brokers who distribute these products in Quebec.

It is important to note that choosing an alternative lender does not compromise the security of your mortgage in any way. Your mortgage contract is registered at the Quebec Land Register under the same rules of the Civil Code of Quebec (CCQ) as any other mortgage loan. The difference lies primarily in the contractual conditions, particularly the penalty calculation method, which can represent significant savings.