What is monoline lending? A monoline financial services company is one that specializes in one specific area. A bank, for instance, can help you with everything from mortgages, insurance, checking accounts, credit cards, lines of credit, and many other financial products. Monoline lenders, on the other hand, will specialize in one specific discipline - in this case, mortgages.
There are pros and cons to dealing with a full-service financial institution versus working with a monoline, which will soon be apparent to you.
For your everyday banking needs like credit cards, checking accounts, lines of credit, travel insurance and similar financial products, it can be convenient to have everything in one place at a regular bank. These are usually lower-impact products, meaning that a slightly better or worse interest rate on a credit card probably won't make or break your finances, let alone paying $10 extra on $200 worth of travel insurance, or a $5 monthly fee for a checking account. The cost is worth the convenience, in most cases, of having everything in one place.
But when it comes to a mortgage, something that will be worth well into the hundreds of thousands of dollars, a small change in percentage can end up representing a very significant sum of money. This is when you should consider the benefits of monoline lenders for mortgages. Many borrowers choose monoline lenders, but even more, people aren't even aware that they exist, let alone what they have to offer.
Advantages of Monolines
1. Simple Business Model
The business model of monoline lenders is simple. They specialize in one area, such as mortgages, or insurance, or any other single product. On the other hand, the big banks have a lot going on, including a lot of moving parts and different ways in which they make money like credit cards, bank accounts, mortgages, insurance, and many other services under the same roof. Monoline lenders can’t use other services as loss-leaders or afford to operate in a sub-optimal way in the area in which they specialize. This brings us to our next point...
Whoever you speak to at a monoline lender is going to be an expert in their field. There are no-frills, no gimmicks, no run-around or being transferred from one department to another after waiting on hold for what feels like all day. Monoline lenders specialize in one specific area of financial products, and that’s what they’re good at, and that's what you'll get.
3. No Aggressive Cross-promotions
Have you ever gone into a bank looking for one thing in particular, and having other services pitched to you? It can be pretty annoying, especially when you realize that they aren’t acting in your best interest. There have been scandals about banks trying to sell services to customers that they really don’t need, and that don’t benefit the customers at all, in order to meet certain quotas. As a customer, this just isn’t a good experience and it’s not good for your pocketbook.
4. Lower Rates due to Lower Overhead Costs
One of the big advantages of monoline lenders is getting a lower interest rate on your mortgage. They don’t have fancy storefronts, they don’t sponsor sports teams or pay millions of dollars to have arenas named after them, they simply aren’t racking up huge expenses as bigger banks do.
National advertising campaigns are expensive, and those costs are factored into the rates you’re going to pay at a big bank, one way or another. Banks also have obligations to their shareholders if they’re publicly traded, and they are able to compete using their established brand names. Monolines, on the other hand, have to compete strictly on offering the very best rates and mortgage plans to their customers.
5. Lower Penalties
In addition to lower interest rates, a monoline mortgage lender will typically impose lower penalties on you, too. Sometimes, you’ll have a little extra money laying around and you’ll want to take a chunk out of your mortgage. A monoline mortgage lender could be more receptive to this, without penalizing you as much for early repayment of your mortgage. Of course, this will come down to the terms and conditions of your specific mortgage loan, so make sure you’re aware of any fines or penalties beforehand.
6. Fully Regulated
The mortgage industry is strictly regulated, so there isn’t any additional risk to you for using a monoline for your mortgage. They have to follow mortgage lending laws and regulations that are put in place to protect consumers. If monoline lenders are going out of business, the mortgage will get transferred to another institution (in some cases, a large national or international bank) but they will have to honour the same mortgage terms so you end up getting the best of both worlds.
7. More Flexible
If you don’t have the greatest credit, it’s possible that a monoline lender will be willing to give you a chance, more so than a traditional bank might. This will vary, of course, on a case by case basis but monolines have been known to display a little more flexibility and understanding towards individuals who might not always meet the standards of a bank.
On this same note, monoline lenders can be more understanding of people with different types of income, for example, someone who is self-employed with a small business and won’t have the same monthly pay stubs or income patterns as somebody who is an employee somewhere.
8. Same Protections as You’d Receive From Banks
As a client of a monoline lender, you are entitled to the same protections as you would receive from a bank. In fact, in some cases, monoline lenders get their funding from banks. You might think banks would hate monolines for undercutting them in price, but banks see them as just another avenue for income and to diversify their holdings. You can take advantage of this as a consumer!
Advantages of Full-Service Lenders like Banks
In some situations, a traditional bank may be a better option than a monoline lender. This isn’t always the case, and it will also depend on your own personal needs and what you prioritize in terms of service, but being informed of all your options is a good first step towards making the correct choice.
Sometimes, it’s just convenient to get everything done in one place. Let’s compare it to grocery shopping. Some stores are always going to offer better prices on certain products than others, so to get the very best price on everything on your list, you’ll have to run all around town to different stores. Most people accept that by doing all of their shopping in one grocery store, they’ll get the best prices on certain items while paying a small premium on other items for the sake of convenience. The same applies to financial products. Your bank may offer the best interest rates in some areas, and not-as-great products in other areas. Of course, you’re free to pick and choose and shop around, but sometimes just having everything in one place, with one log-in, one overview to see the whole picture, is worth it.
Some consumers have reported that they feel uncomfortable using a monoline mortgage lender because these are companies that don’t advertise a lot, that you may not have heard of before, and that won’t have a branch at the end of the street that you can walk into to talk to somebody in person. While all of these traits reinforce the reasons that monolines are able to offer better rates, some people prefer the peace of mind of seeing the name of a major bank at the top of their statements. Remember that monolines are regulated and have to follow strict rules for lending, it’s not the Wild West for them. Just because you haven’t heard of them before, it doesn’t mean they aren’t reputable. If you worked in the world of finance and mortgages, you probably would have heard of the larger monoline lenders, but as a consumer, it’s just not really relevant to you until you’re shopping for a loan.
Nonetheless, if you’re someone who wants to see a recognizable brand at the top of your monthly account statements and that’s something you need in order to feel comfortable with your mortgage, then a monoline lender probably isn’t the best fit for you - even if it means you’re paying extra.
Monoline Mortgages, Brokers, and Banks
Many brokers will have access to mortgages via monoline lenders, along with products from big banks. The banks may not always offer the best rate, and you should feel just as comfortable using a monoline lender if they have the best offer for you. While a broker may have access to better rates from banks than you could get on your own, it’s still common for a monoline mortgage lender to swoop in and beat the bank’s wholesale rates that are offered to brokers, so it’s definitely worth considering.
A great broker will work with large banks, smaller local banks, and monoline lenders to track down the very best rates and terms for their clients, so be wary of a broker who seems to only deal with one or two institutions as they could be more concerned with keeping a strong relationship with one or two banks, as opposed to finding the very best rates for you.
Final Thoughts on Getting the Best Mortgage
Don't be married to any single financial institution, there are many lenders to choose from and they should be competing for your business. They want to write mortgages, it's a very profitable practice for them. Find lenders who will offer you credit on terms that sit well with you, rather than ones that make it seem like they're doing you a huge favour. You are the customer, after all. The best mortgages for your needs could come from banks, or from brokers, from a monoline lender, or from a full-service financial institution. Don't rule out any options until you've considered all of the different mortgages that are offered to you.