Homeowners in Canada continue to rely on alternative and private lenders for financing and refinancing, as high interest rates have made it increasingly difficult to qualify for traditional mortgage options. The total value of outstanding loans from private lenders, mortgage investment companies, and other alternative lenders was up 4% in the second quarter of 2023 compared to the year before, and up 18% compared to the first quarter of 2020, according to Statistics Canada. In Ontario, private mortgages jumped a whopping 72% to over $22 billion in 2021 from $13 billion in 2019, according to a report by the Financial Services Regulatory Authority of Ontario (FSRA). Overall, CMHC believes private and alternative lenders account for roughly 10% to 12% of the country’s mortgage market as of 2023.
Private mortgage lenders are generally much more flexible compared to traditional lenders because they’re not bound to the same conservative rules and regulations. While banks base their lending decisions on credit history and income, adhering to strict debt servicing guidelines, private lenders. They can take into account other factors such as home equity and non-traditional income sources, focusing more on the story behind the numbers.
Private mortgage lenders generally have much faster turnaround times, require less documentation, offer more customized terms and repayment, such as prepaid options, and can tailor solutions to meet the unique needs of borrowers. Private mortgage lenders also provide options traditional lenders cannot, such as second mortgages and financing for CRA tax arrears.
The trade off for more flexibility and assuming more risk than banks and other traditional lenders is often higher interest rates. However, in some instances, a private mortgage could save your clients money.
As a mortgage broker, it’s important to understand the evolving private lending landscape to best serve your clients in our current uncertain economy.
Factors driving the rise in private mortgages
There are several factors that contributed to the continued growth of the private mortgage lending space. Historically a niche market, private lending started to pick up steam once traditional lenders started imposing stricter lending criteria.
Banks and other traditional lenders started to take a more conservative approach following the 2008 financial crisis. Private lenders slowly started to fill the lending gaps, offering solutions to borrowers who couldn’t meet the stricter criteria. Then—in 2021—failing to qualify for a bank mortgage became a reality for even more Canadians when the stress test rules came into effect for all mortgage borrowers. These rules, which were put into place to ensure that borrowers can still qualify for their mortgage if interest rates rise, require borrowers to qualify for a mortgage rate of 5.25% or a rate that is 2% higher than their contract rate (whichever is higher).
As private mortgages started becoming a more common option, the COVID-19 pandemic amplified growth. Although there was initially a sudden decline in home sales at the start of the pandemic, home sales and prices rebounded to surpass pre-pandemic levels by mid 2020 due to record-low interest rates. Canada had a record year of property sales in 2020, with a 12.6% increase in transactions compared to 2019. In addition, Canadians grappled with job loss and changes to lifestyle, goals, and needs. During this time, banks and traditional lenders took a cautious approach and tightened their requirements in response to the volatile economic shift, which pushed more borrowers to turn to private solutions.
The current private mortgage landscape
Rising property prices and increased demand for housing, combined with increasingly strict conventional mortgage lending regulations, continue to fuel the need for private and alternative mortgages. Private mortgages are no longer a niche market, but an essential solution for non-conventional borrowers and an integrated player in the mortgage landscape.
Canada’s mortgage market is currently navigating a challenging economic environment. According to the Bank of Canada, 80% of all mortgages outstanding as of March 2022 are coming up for renewal in 2024, which accounts for approximately $250 billion in mortgages. Next year, another $350 billion in mortgage renewals is expected. Amidst this “mortgage renewal shock,” household indebtedness also remains a concern. And, even though rates have started to ease with the Bank of Canada recently making its first rate cut in four years, many borrowers will see their monthly mortgage payments increase significantly.
While lower rates will provide some relief for Canadian homeowners and potentially breathe some life into the real estate and mortgage markets, many borrowers will continue to struggle to meet lending requirements at banks and other traditional lenders, leading to continued demand for private mortgages.
The changing regulatory environment
Canadian private mortgage lenders like CMI have demonstrated an ability to adapt and evolve with the market. Online platforms and digital lending services have made it easier for borrowers to access private mortgage options, increasing competition and transparency in the mortgage market. And, as private mortgage solutions continue to grow in popularity, private mortgage lending has also had to adapt to new regulatory changes.
Federal and provincial governments have recently introduced several rules to minimize risk to borrowers across the mortgage market. Specifically, if you’re a mortgage broker in British Columbia and Ontario, you may have new licensing requirements or learning mandates. Last spring, the Ontario government and the FSRA implemented a new two-tiered accreditation for mortgage agents and introduced enhanced educational requirements for brokers and agents working with private mortgage lenders, while BC’s new new mortgage services act introduced stronger regulations for mortgage brokers, lenders and administrators, and established new licensing requirements and increased financial penalties.
Other recent initiatives have focused on mortgage suitability and raising professionalism in the mortgage brokering sector. These rules are designed to ensure you have the necessary knowledge to provide informed mortgage advice, particularly in the private lending space. It’s essential to familiarize yourself with these new obligations as they could affect the way you work and the range of products and solutions you can offer to clients. At CMI, we prioritize broker education and are committed to supporting you in understanding these new rules. We can deliver presentations on private lending to your team, offer one-on-one support to discuss specific client scenarios, or assist in other ways to help you navigate the changing landscape effectively.
The role of private mortgages
In the current mortgage market, the need for private solutions has become even more apparent. Understanding situations where private mortgages are best suited can greatly benefit your business as a mortgage broker and advisor to clients. Private mortgages offer several advantages, including faster approval times and more flexible lending criteria. This is particularly beneficial for self-employed individuals, those with non-traditional income, CRA tax arrears, temporary work interruptions, poor credit histories, as well as new immigrants and other unconventional borrowers.
Private mortgages have become a crucial element in the overall mortgage market, injecting liquidity that supports continued housing activity and providing stability by offering alternatives when traditional lending avenues are not an option. Private mortgages provide borrowers with a short-term financing solution to meet an immediate need, positioning them to transition to a traditional lender that typically offers lower mortgage rates. It’s often a valuable solution for existing homeowners that have accumulated equity and need to solve for an immediate pain point–whether it’s to consolidate debt, cover an unexpected expense, purchase another property, renovate an existing property, or help a family member, for example.
With the Bank of Canada beginning to lower its benchmark rate borrowers will likely turn to you for guidance in navigating the changing market. Proactive communication can set you apart from others in the field. At CMI, we’re committed to ensuring you’re well-prepared for these conversations. We offer support to help you confidently recommend private mortgage solutions where they fit best. This proactive stance not only enhances client trust but also strengthens your position as a knowledgeable advisor in a changing market landscape.
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