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Private Lending Continues To Grow

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Private lenders have doubled their share of Canadian mortgages since 2015.

A Better Dwelling report revealed that private lenders originated over $2 billion last year and currently have about 7.87% of the national mortgage market. In fact, the private channel has enjoyed six straight quarters of market share growth.

Private mortgage broker Amit Sandhu of Sandhu Capital believes that the stress test and rising interest rates will reroute more borrowers towards the private channel, but noted that uncertainty has gripped the market this year.

Interest rates rising will make private lending more popular among borrowers. However, 2018 is a year where everything is slow. Banks won’t originate as much and private lenders won’t originate over $2 billion like they did last year. Everybody is nervous this year, including lenders and borrowers, and everybody is playing with that fear. So far 2019 has been a decent year. Housing prices have flattened out, and sales have slowly picked up in the last quarter. With the election coming up, there may be major fluctuations in prices as different parties are for and against the mortgage stress test.

Stringent qualification from chartered banks may leave borrowers with few choices other than private lenders or alternative financing.

“The population is growing. More folks are coming in and lenders are not willing to lend, so where are these folks going to go?”

Amit Sandhu, a Mortgage Architects broker, doubt’s private origination growth will slow down, because there’s nary a sign that lender regulations will ease any time soon. Even with regulations easing, the market for private mortgages is attractive due to higher prices and lower income levels, and speed of processing.

“I focus on private mortgages because I understand them very well and I have a network that provides me competitive rates for my clients. I can advise my clients how to approach getting a loan from a MIC or private lender, what kind of rates and fees to expect and if it’s an attractive option for them, given their current financial state.”

 

The Problem with the Mortgage Stress Test

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“The stress tests are great,” Pasalis says of the measure which requires mortgage applicants to qualify for their loans at a higher interest rate than they are signing on for.

As he sees it, there’s just one problem. “The problem is, it was probably too much, too quick.”

The new mortgage rules have come at a time when mortgage rates are on the rise. Pasalis, president of the Realosophy brokerage, notes how the Bank of Canada has hiked the overnight rate five times over the past six quarters. That, together with the stress testing, has added 300 basis points to the qualifying rate for homebuyers.

Pasalis highlights how much the lending landscape in Canada has changed for borrowers over the past 10 years.

“Policymakers thought extending credit to households was a great idea,” says Pasalis, noting that a decade ago consumers had access to 40-year amortizations.

Today, amortizations are capped at 25 years and a stress test has come with higher interest rates.

“I think it’s a lot in a relatively short period of time, especially over the past 18 months, to introduce these measures, and I think you can’t sort of shift the underlying philosophy of how you’re lending to consumers significantly without there being consequences,” says Pasalis.

The stress test has been commonly cited as one of the main causes of the Canadian housing market cooldown that played out last year. Experts have estimated that the stress test eats away at a mortgage applicant’s buying power by about 20 percent.

In commentary posted to Twitter, Pasalis speculated that policymakers may ease stress testing if the Canadian housing market continues on its downward trajectory this year.

Already, he suggests, a significant number of borrowers are turning to private lenders, who typically charge higher interest rates but are not mandated to impose a stress test. “As a result, they are paying much higher rates for their debt, spending less, [and] saving less.”

Source: Mortgage Architects