Credit Unions vs Banks

WOWA Simply Know Your Options

Banks are financial institutions that offer deposit services, loans, mortgages and many other financial services to their customers across the country. Banks are open to everyone; thus, anyone can become a customer of a bank. Banks are focused on making a profit to please shareholders, who don’t have to be customers of the bank or use any of the bank’s services. Banks also usually offer a broader range of services than credit unions.

Credit unions are just like banks in that they offer services such as bank accounts, loans, and mortgages but differ in how they operate. Credit unions, also known as caisses populaires, are not-for-profit financial institutions that offer their services exclusively to their members. In order to become a credit union member, you will need to purchase a membership share. Credit unions are member-owned institutions focused on providing services that benefit their members. There are two types of credit unions in Canada — federally regulated and provincially regulated.

Comparing Credit Unions and Banks

Federal Credit Unions and banks are regulated by the Office of the Superintendent of Financial Institutions (OSFI) and operate under the Bank Act. Even though credit unions can be smaller than banks, they can be just as safe to do business with. Federal or provincial regulations and deposit insurance ensure that credit unions are safe to get a mortgage, borrow, invest, or save.

Banks and federally regulated credit unions are open to all residents of Canada.

Provincially regulated credit unions may be targeting only residents of the credit union’s home province, a particular area, or even a particular profession. For example, the New Brunswick Teachers Association (NBTA) Credit Union focuses on teachers in New Brunswick but is also open to the general public in New Brunswick. On the other hand, the Ontario Provincial Police Association (OPPA) Credit Union is only open to OPP officers, OPPA members, and family members of officers or OPPA members.

When looking at mortgage rates in Canada, you will often see credit unions offering lower mortgage rates than the Big Five Banks or to see them offer higher savings interest rates than the banks. This is because credit unions aren’t as incentivized to make a profit as the big banks. Credit unions are non-profits, meaning they must distribute the excess money earned to members or reinvest it back into the credit union.

Profit sharing with credit unions is in the form of dividends, which are also known as patronage rebates. The profit sharing that you receive can effectively lower your mortgage payments or boost your savings interest rate. This can be in the form of cash or surplus shares. Some credit unions require you to have a minimum number of surplus shares before you can redeem or withdraw your surplus shares. This minimum redemption amount is usually $1,000.

This rebate or dividend is based on the products that you have with the credit union and how much you have paid or received:

• If you borrow from the credit union and pay interest, such as through a mortgage, personal loan, or home equity line of credit, you may get a rebate on the interest you paid.
• If you receive interest through a savings account, chequing account, GIC, RRSP, TFSA, or a term deposit, you may receive a bonus interest payment and a service charge rebate.

Example of an Annual Credit Union Patronage Rebate

The mortgage stress test is a federal rule meant for federally regulated financial institutions, such as federal credit unions and banks.

Provincially regulated credit unions do not have to use the stress test; however, some provincially regulated credit unions still use the stress test even though they are not required to do so. In these cases, the stress test will be used more as a way for the credit union to evaluate your application than as a hard benchmark.

If you fail the stress test at a bank or a federal credit union, you will not be able to get a mortgage with them. If you fail the stress test at a provincially regulated financial institution, you may still be able to get a mortgage. The lender will consider other factors that make it possible for them to be more flexible.

Federal credit unions and banks are members of the Canada Deposit Insurance Corporation (CDIC), which means that your eligible deposits at these institutions are insured and protected for up to $100,000.

Provincially regulated credit unions are not covered by CDIC deposit insurance but usually have provincial coverage. For example, the Financial Services Regulatory Authority of Ontario (FSRA) covers eligible deposits at credit unions and caisses populaires in Ontario for up to $250,000 for non-registered accounts and offers unlimited coverage for registered accounts.

Getting a mortgage at a credit union allows you to possibly get a lower mortgage rate, bypass the federal mortgage stress test, and potentially save on fees. You may also qualify for a mortgage with a lower minimum credit score. Some credit unions that are focused around a particular area, such as serving only a local area, may understand your financial needs better than a big bank. You might even receive a rebate on the interest paid on your mortgage.

Banks have a nationwide presence, with physical branches and ATMs across the country, while credit unions may have a smaller number of branches. If you prefer in-person service, a bank might be a better option if your credit union doesn’t have a local branch.

Many, but not all, credit unions offer CMHC-insured mortgages.

No. Banks and federal credit unions are protected by the Canada Deposit Insurance Corporation (CDIC). This means your deposits up to $100,000 will be insured.

However, provincially regulated credit unions are not typically protected by the CDIC. Some local associations may have provincial protection, such as the Financial Services Regulatory Authority of Ontario (FSRA), which protects your deposits up to $250,000. However, provincially regulated credit unions are not typically covered by the CDIC. Always double-check your provincial regulatory authority and determine if they insure your credit union.

In order to become a credit union customer, you will need to purchase a membership share. Some credit unions are only open to residents of a certain province, area, or with a particular profession.

A share may cost as low as $5, and purchasing a share makes you a member of that credit union. If you ever decide to leave and close your account at a credit union, you will receive the full share back.

Credit unions often provide lower costs, higher savings rates, and more personal service to their members. Credit unions may also offer borrowers lower interest rates on loans.

Additionally, obtaining a loan with a credit union may be easier than obtaining one from a larger impersonal bank. Credit union members also get to vote on policies and decisions made by the financial institution.

Credit unions cannot compete with banks when it comes to conveniences such as ATMs, branches, and mobile banking. Credit unions may provide lower interest rates on loans, but the range of financial solutions offered may be restricted compared to major banks.