Canada’s tougher new mortgage qualification rules have driven more business to private lenders, who are seeing soaring demand from borrowers who cannot qualify for bank loans.
A new study by land registry company Teranet and Toronto real estate broker John Pasalis shows private lenders are especially gaining ground in the market for mortgage refinancings, which are mortgage loans that do not involve a sale of a property. Many homeowners use refinancings to increase the size of their existing mortgages to consolidate and pay off other debts, such as credit cards.
In the second quarter of 2018, 20 per cent of mortgage refinancings in the Greater Toronto Area came from private lenders, a 67-per-cent increase from the same quarter of 2016, the report said.
Private lenders accounted for 6.8 per cent of new mortgages for homes that sold in the second quarter this year, up from 4.9 per cent in the second quarter of 2016.
Mr. Pasalis, who is president of Realosophy Realty Inc., said it makes sense that private lenders are gaining market share most quickly for refinancings because they often involve more indebted borrowers who are even less likely now to be able to qualify for conventional loans from banks.
“Most of these people who are turning to private lenders probably don’t qualify under the stress tests and are looking to take on additional debt to borrow more against their homes and consolidate their debt,” he said.
Private lenders include mortgage investment corporations, which pool funds from investors, as well as individuals who lend through mortgage brokers who match them with residential borrowers.
The new study is one of the first reports to offer detailed data on private lending trends since the Office of the Superintendent of Financial Institutions – which oversees banks – introduced new rules Jan. 1 requiring borrowers to prove they can still afford their mortgages even if interest rates were significantly higher than the rate they negotiated with their bank.
Credit unions are also not OSFI-regulated, but the report found little meaningful growth in their market share this year. Many credit unions have voluntarily applied all or part of the OSFI guideline to ensure their lending is safe if rates rise.
The report shows the market share of all private mortgages by dollar volume in the GTA climbed to 10 per cent in the second quarter of 2018 from 6 per cent in the first quarter of 2016. Total private mortgage loan volumes were $1.5-billion in the second quarter of 2018, the report said, up more than 60 per cent from $920-million in the first quarter of 2016.
Private mortgages have become most popular in the regions of the GTA that also saw the highest percentage of investors buying homes in 2017, led by York region north of Toronto, the report said.
Mr. Pasalis said some buyers have found it hard to charge enough rent to cover the carrying costs on investment properties that were purchased at the height of the market in 2017, and may be seeking refinancings to cover their costs.
“Some people have two or three properties that are negative cash flow, and their debts are going up," he said.