Credit Unions vs Banks

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What are Credit Unions?

You might already be familiar with Canada’s Big Five Banks, namely RBC, TD, Scotiabank, CIBC, and BMO; but what are credit unions and how do they differ from banks? Credit unions are just like banks in that they offer services such as bank accounts, loans, and mortgages, but they differ in how they operate.

How Can I Join a Credit Union?

Credit unions, also known as caisses populaires, are not-for-profit financial institutions that are owned by customers of the credit union. In order to become a customer of the credit union, 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 do decide to leave and close your account at a credit union, you will receive the full amount of your share back.

Differences between Credit Unions and Banks

Credit unions largely offer the same products and services, but they may also have better customer service, lower fees, and better rates than banks. Credit unions are focused on providing services that benefit their members.

Since members are part-owners with voting rights through their membership shares, you can vote for the credit union’s board of directors. Banks are focused on making a profit to please shareholders, which don’t have to be customers of the bank or use any of the bank’s services.

Credit Union vs Bank: Interest Rates

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, and even if they do, credit unions will return the profits back to the community and their members.

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 rate or boost your savings interest rate. 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 are borrowing from the credit union and paying interest, such as through a mortgage, personal loan, or line of credit, you may get a rebate on the interest you paid.

If you are receiving interest, such as 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

ProductInterest PaidInterest ReceivedRebate (4%)
Line of Credit
Savings Account
Total Annual Rebate Received:$804

Since credit unions are non-profits, this means they will need to distribute their excess money earned to members or reinvest it back into the credit union. If they decide to distribute their profits to members, you will receive a dividend payment or patronage rebate. 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.

Stress Test at Credit Unions

The mortgage stress test is a federal rule meant for federally regulated financial institutions, such as federal credit unions and banks. For example, if you get a mortgage with federal credit unions Coast Capital Savings or UNI Financial Cooperation, you will need to pass the mortgage stress test.

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, rather than a hard benchmark that can be failed.

If you fail the stress test at 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, which makes it possible for them to be more flexible.

Credit Union vs Bank: Regulations

Credit unions can either be federally regulated or provincially regulated in Canada. 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 a safe place to get a mortgage, borrow, invest, or save with.

Federally regulated credit unions (known as Federal 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.

Federal Credit Unions

There are two federally regulated credit unions in Canada: Coast Capital Savings Federal Credit Union and UNI Financial Cooperation (UNI Coopération financière). These federal credit unions are members of the Canada Deposit Insurance Corporation (CDIC), which means that your eligible deposits at these two federal credit unions are insured and protected for up to $100,000.

Federal Credit Unions are regulated just like banks are in Canada; they are both regulated by the Office of the Superintendent of Financial Institutions (OSFI) and operate under the Bank Act.

Provincial Credit Unions

Provincial credit unions are regulated by their home provinces. Provincially regulated credit unions are not covered by CDIC deposit insurance, but there can be 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.

Credit Union or Bank for a Mortgage

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. 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 nation-wide 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.

The EXCHANGE Network

While credit unions may have a limited number of branches, many credit unions and smaller banks participate in the EXCHANGE Network. If you are a member of a participating credit union, you will be able to use ATMs at all EXCHANGE ATMs across the country without any fees. In comparison, if you are a customer of a big bank, you may be charged a fee to use another bank’s ATM.

Some participating credit unions and banks in the network include: Alterna Savings, Canadian Western Bank, Coast Capital Savings, DUCA Credit Union, FirstOntario Credit Union, HSBC Bank, ICICI Bank, Laurentian Bank, Manulife, Motusbank, Meridian Credit Union, National Bank, and Vancity Credit Union.

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