Private mortgages now account for more than one in 10 Canadian mortgages. Houses with real estate signs in East York, Toronto, on Oct. 12, 2021.Christopher Katsarov/The Globe and Mail
To say demand for private mortgages has risen would be the mortgage understatement of 2023. The higher interest rates go, the more desperate some Canadians are to get financed or refinanced.
In just 10 quarters through September, 2022 – the latest national data from Canada Mortgage and Housing Corp. – private mortgage market share surged 45 per cent. It now accounts for more than one in 10 Canadian mortgages.
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Private mortgages are short-term financing products for people who can’t qualify for traditional mortgages. They’re offered by smaller companies and involve higher rates and fees in exchange for more flexibility compared to traditional banks.
These loans are usually provided by mortgage investment corporations and individual private lenders. Traditional mortgage brokers have owned this market for decades. But that’s changing, thanks to the internet and automation.
One company on the vanguard of that change is LenderBidding. It’s disintermediating traditional private mortgage sources and saving private borrowers a wad of money. Here’s how.
Automated mortgage bidding
Banks, credit unions, trust companies and mortgage finance companies provide 90 per cent of mortgages in this country. But if you can’t get approved through them, and you have 20 per cent equity or more, private lenders can be a last resort.
The problem with private lenders is cost. They sell mainly one-year interest-only loans, and in return for looser approval guidelines, their rates can be much more than 300 basis points above bank rates for uninsured mortgages.
And then there are the fees. You’ll typically pay at least 200 bps to the lender and another 150-plus bps to the mortgage broker to get private financing. These days, it’s not uncommon for private borrowers to cough up four to five percentage points in total fees. That’s on top of marked-up closing and legal fees.
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LenderBidding is trying to change all that.
It’s an auction platform for private mortgages. In exchange for a 0.99 per cent fee, it’ll present your private mortgage application to dozens of competing private lenders, mostly mortgage investment corporations.
The borrower remains anonymous to lenders, and within hours, those lenders bid on the mortgage. LenderBidding then helps you choose between their bids, and your lawyer closes the mortgage.
There are no fees to the borrower unless and until the mortgage closes, all lenders are licensed and vetted, and on average, borrowers get around seven to eight bids per application.
The entire transaction happens online, but borrowers can call or message non-commissioned LenderBidding agents for help.
“Brokers don’t like us because we’re charging less and offer something they don’t have,” says LenderBidding chief executive officer and co-founder Jason Geall. “Our goal is to cut the middleman out.”
One downside of that
Middlemen and middlewomen can certainly inflate costs. But costs and value are two different things.
Brokers can and do add value in complex transactions – such as non-prime lending, in which there are underwriting exceptions and pitfalls galore.
Unlike regular brokers, LenderBidding sticks mainly to mortgage investment corporations. It doesn’t deal with all the biggest institutional non-prime lenders (which offer lower costs, assuming you qualify) and hard-money individual private lenders (which often offer more flexibility than MICs). But the company says it’s working to ramp up its ability to recommend such lenders in cases where they’re more suited to the borrower.
“Private or MIC lenders are always a last resort,” Mr. Geall says. “You don’t want to be stuck with a private forever because, at that point, you’re just burning through equity. Eventually, the music stops, and no chairs are left for the borrower.”
That’s why, if you get turned down by a mainstream lender and want to try an online provider, the best bet is to shop a regular mortgage broker for a second opinion.
Focus on brokers who specialize in private financing, have years of experience and have a favourable Better Business Bureau rating and/or solid online reviews. Non-prime lending is a different animal than your vanilla bank mortgage, so you don’t want a greenhorn working on your application.
And no matter how good a deal you get on a private mortgage, get one only if you’ve got an exit strategy. That means having a plan to remediate your credit, improve your income situation or reduce your debt load. Because, with effective borrowing costs near or above the double digits, privates should never be more than a six to 24-month solution.
All that said, LenderBidding is shaking up a space that needed a shakeup. The online disintermediation of the mortgage market continues.
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The mortgage market always has its eyes on the five-year government bond yield, which guides fixed rates. That yield zoomed to a new high since the global financial crisis on Thursday.
The catalyst was U.S. rates. They rocketed higher as inflation-unfriendly data raised the prospect of another Federal Reserve interest rate hike in September.
We haven’t seen fixed and variable mortgage rates this high in more than two decades. That’s widening cracks in the Canadian economy as more and more borrowers run out of credit and savings. Insolvency risk and depleted discretionary income are precisely why the Bank of Canada can’t afford much more interest rate tightening.
In the mortgage rate department, leading insured and uninsured five-year fixed rates rose 10 bps this week. The lowest nationally-available insured variable climbed five bps. Apart from that, it was a quiet week among the rate leaders.
Next week may not be so quiet, given the new highs in government bond yields. The Canadian bond market is making its demands clear. Investors want the Bank of Canada and Fed to provide a clear bias toward pausing before they’ll give us meaningful rate improvement.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on July 27, 2023. Only providers advertising rates online and lending in at least nine provinces are included. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
