An increasing number of homeowners turned to alternative lenders last year, while new mortgage growth reached its slowest pace in more than a quarter of a century amid government interventions aimed at cooling the housing market, according to a new report.
Alternative lenders, which take on clients with riskier profiles for shorter terms at higher interest rates, held one per cent of Canadian mortgages last year, according to a first-of-its kind report from the Canada Mortgage and Housing Corporation.
There were 200 to 300 active alternative lenders in Canada last year holding $13 billion to $14 billion of outstanding Canadian mortgages. That’s up from $11 billion to $12 billion the year prior and $8 billion to $10 billion in 2016.
The data suggests that “their share in this space is growing,” said Tania Bourassa-Ochoa, a specialist in housing research with CMHC.
Loans from alternative lenders typically have terms between six months and two years. In 2018, they offered interest rates between 7.3 and 11 per cent, with an average of 8.99 per cent. Banks, by contrast, offered 3.3 per cent to 5.4 per cent rates on mortgage loans with terms that generally last several years.
People who turn to alternative lenders have riskier profiles, according to the report. Their clientele includes people who are self-employed, investors carrying more than one property, and borrowers who need short-term cash due to poor credit history, health problems, divorce or other issues.
Such mortgages have higher delinquency rates than those given by other lenders. In the third quarter of 2018, the delinquency rate for alternative lenders was 1.93 per cent, according to the report. Mortgage finance companies, credit unions, caisses populaires and banks all reported delinquency rates at 0.25 per cent or lower during that same time.
“It gives me great concern,” said Laurie Campbell, CEO of the non-profit agency Credit Canada, of the rise in alternative lending.
The short terms and high interest rates put people in a vulnerable position, she said, especially if interest rates are rising. It doesn’t help that many of these borrowers are people who could not qualify for a bank mortgage, making them higher risk, she said.
They could get into a situation where rates are higher when their term is up and not even alternative lenders will renew their mortgage, she said, forcing them to sell their property.
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