Since its founding in 2018, Montreal-based Nesto has grown rapidly. Its most recent spurt occurred in June with the acquisition of CMLS Financial Ltd., the country’s third-largest mortgage finance company.Nathan Denette/The Canadian Press
Fresh from gobbling up a much larger residential and commercial mortgage player, online lender Nesto Inc. has its eye on a larger slice of the mortgage market.
A slew of homeowners will soon be renewing their cheap pandemic-era mortgages at much higher interest rates and Nesto believes this will be the company’s opportunity to build its portfolio of residential loans.
“We call it the great renewal,” Nesto chief executive officer Malik Yacoubi said in an interview. “There will be a big wave of renewals, which could create some opportunities for us to grab market share.”
Since its founding in 2018, Montreal-based Nesto has grown rapidly. Its most recent spurt occurred in June with the acquisition of CMLS Financial Ltd., the country’s third-largest mortgage finance company.
The deal pushed Nesto into the big leagues of non-bank lenders as well as into the commercial mortgage sector. Nesto-CMLS has $60-billion in outstanding mortgages, up from Nesto’s $10-billion prior to the deal. The combined company has 1,000 employees in 10 offices across the country compared with 300 Nesto staff.
The acquisition was backed by Nesto’s large investors including Sagard-backed Diagram Ventures, Portage and Power Corp. of Canada subsidiary IGM Financial.
Mr. Yacoubi is aiming to expand his company’s reach and get out further in front of mortgage shoppers. Nesto mortgages are already available through the company’s website, as well as through a large network of brokerages.
Homeowners and buyers who took out a mortgage during the pandemic were able to get loans with interest rates below 2 per cent. Many of those cheap mortgages have five-year terms that will have to be renewed in 2025 and 2026.
With mortgage rates now hovering around 5 per cent, those homeowners will see a significant increase in their payments and they will be looking for their cheapest options.
“They’re more inclined to shop, which in our perspective, we see that as an opportunity to capture market interest,” Mr. Yacoubi said.
About 2.2 million mortgages or about 45 per cent of the outstanding mortgages in the country will face a spike up in interest rates this year and next, according to federal housing agency Canada Mortgage and Housing Corp. It estimates that homeowners’ average monthly payment could increase between 30 to 40 per cent.
Since borrowing costs started increasing in 2022, the big six Canadian banks have gained market share from other lenders. As of the end of last year, they had 64.8 per cent of the new mortgages or mortgage originations. That was up from 53 per cent at the end of 2022, according to data from CMHC. (Originations include renewals and refinancings.)
In comparison, the non-bank mortgage lenders had 8.8 per cent of the mortgage originations at the end of last year compared with 10.3 per cent at the end of 2022, according to CMHC data. Credit unions, mortgage investment entities, trusts and other chartered banks account for the rest of the originations.
The higher interest rates in 2023 made it much harder for borrowers to switch lenders if they had to renew their loan that year. That is because borrowers without an insured mortgage must requalify under the federal mortgage stress test if they switch lenders. If borrowers renew their loan with the same bank, they are not subjected to the tougher qualifying rules.
However, mortgages are becoming slightly cheaper after the Bank of Canada cut interest rates. That means it could become easier for borrowers to switch lenders.
And that is what Nesto hopes to capitalize on.
“I guess everybody is looking to be number one at some point,” Mr. Yacoubi. “That means we will be ambitious.”
With $60-billion in mortgages under administration, Nesto-CMLS is less than half the size of the country’s two largest non-bank mortgage lenders First National Financial Corp. and MCAP Group.