Government policy like the mortgage stress test was introduced to cool Canada’s housing market, which it did, but some buyers have decided to simply go a different route, and it could be bad for the overall health of the market.
A recent report from the Canada Mortgage and Housing Corporation found that more homebuyers borrowed with alternative lenders last year, while the overall rate of mortgage growth eased to its slowest pace in more than 25 years.
Alternative lenders tend to take on riskier borrowers, and they offer shorter terms and higher interest rates. The report says that most of the types of profiles with alternative lenders include people who are self-employed, investors with more than one property, those with bad credit, health issues, or divorce issues. Sometimes, it’s a combination of these things.
CMHC refers to the alternative lenders as Mortgage Investment Entities, including Mortgage Investment Corporations and private lenders (could be an individual). “When approving a loan, the main objective is to facilitate exit strategies for customers allowing them to eventually return to the traditional lending space,” reads the description of MIEs in the report. “In many cases, they play an important liquidity role by providing funds to individuals in need of immediate cash to avoid defaulting on their mortgage payments, acting as a buffer in the mortgage landscape.”
Alternative lenders held 1% of mortgages in 2018, with 200 to 300 active lenders last year holding $13 billion to $14 billion of outstanding mortgages. In 2017, alternative lenders held $11 billion to $12 billion in outstanding mortgages, and $8 billion to $10 billion in 2016.
An alternative lender is typically the route people take when they can’t get a mortgage from a bank. CMHC found that alternative lenders were offering rates between 7% and 15% last year, with an average rate of nearly 9%. Compare that to the big banks offering rates from 3.3% to 5.4% during the same time period.
There’s no benefit of going with an alternative lender other than the fact that you’ll likely get approved, but in the long run, it will end up costing you more.
The delinquency rate with alternative lenders was also much higher last year at 1.93%, compared to a big bank with a delinquency rate of 0.25% or lower. If a bank denies someone because they can’t afford a 3.5% mortgage rate, the chances of that same borrower affording a 9% rate are pretty slim.
When you can’t make mortgage payments, you’re forced to sell your home. If more buyers are going the alternative route with their mortgage, that means there will be more homes selling not because the owners want to move, but because they have to. Then the only housing option for those who were forced to sell will be rental, and if they have bad credit, which they will after not making mortgage payments, it will be tough to secure housing.
We don’t think that this is necessarily a sign of bad policy by the government because no matter what type of regulations the government puts in place, some people are going to find a way to get themselves into an awkward position financially.
But, perhaps this is a warning that the government needs to step in and regulate alternative lenders more in an effort to prevent mass delinquencies across the country.