A “Balance Sheet Lender” is any chartered bank in Canada. They are referred to as “Balance Sheet Lenders” because they hold your mortgage on their books as an asset. These Lenders can only increase the value of their asset (your mortgage) by increasing the spread between their cost of funds and the rate at which you pay interest on your mortgage. The opportunities to do this occur when a variable rate client is looking to lock into a fixed rate and when a client’s mortgage is maturing. Everyone realizes that there are penalties associated with breaking a variable rate mortgage (3 months interest) and that even with a maturing mortgage there is a level of inconvenience associated with collecting documentation and moving to another lender for a slight decrease in rate. “Balance Sheet Lenders” will use these barriers to exit to their advantage and charge marginally higher rates to existing clients.
It is for this reason that we advise our clients to deal with Mortgage Servicers and Investment Banks who have their mortgages guaranteed by the Canadian Government and sell the end product to pension plans and mutual funds. As a “Non Balance Sheet Lender” a mortgage servicer has the same motivation as you, they want you to be their client and stay as their client based on rate alone. Since your mortgage is guaranteed by the Canadian Government there is only one rate that you can be charged, there is no ability for the lender or servicer to increase your interest rate, and due to the efficiency of the market they cannot make more money by selling you a higher rate when you lock into a fixed rate mortgage from a variable, or when you renegotiate your mortgage at maturity.
By aligning the motivations of the client, the broker, the servicer, and the lender through a compensation model that rewards long term clients with continued low rates everyone wins.
The client never has to switch lenders as they are always offered the lowest market mortgage rate.
The broker is paid a retention bonus for servicing the client over the life of the mortgage and keeping the client with the same lender.
The Servicers are paid an annual fee to manage the mortgage cash flows and save a great deal by retaining existing clients and foregoing the higher costs of attracting new clients. Finally the Lenders, who are all Institutional Lenders in Canada, are offered a risk free investment (Government Guaranteed Canadian Mortgages) with a higher rate of return than Government of Canada Bonds.