Canadian real estate sales are just off of record highs, but how many buyers had to skip traditional lenders? Bank of Canada (BoC) numbers show more buyers are turning to private mortgages. The sparsely regulated form of lending allows people with insufficient credit to get a mortgage at steep rates. Despite the steep rates, these lenders have seen their share of the market double since 2015.
Private mortgage lenders are a popular way to get a mortgage, but with little regulations. Unlike federally regulated financial institutions (a.k.a. banks), these lenders are not regulated by OSFI. Consequently, they are not subject to pesky rules, like B-20 Guidelines. They’ll lend you whatever you want, as long as they believe the can recover what they lent you. Sounds great, so why doesn’t everyone use them?
Private lenders charge steep rates, which prime borrowers shouldn’t pay. These borrowers typically pay over 200% what they would at the Big Six, making it difficult to break even. For example, if you borrowed a mortgage at 2.75% you would need prices to rise at least 16.28% over five years to break even on direct costs in Toronto. If that mortgage rate was 9%, you would need prices to rise over 42.55% during that same period – a lot more. To sum it up, people borrowing from private lenders don’t have the credit needed to borrow, and have lofty expectations for price growth. There’s a term for people that have a less than prime borrowing criteria, but it always slips my mind.
Private Lenders Now Hold Almost 8% Of Canadian Mortgages
Canadians have been turning to these lenders even before stress tests. Over 7.87% of the Canadian mortgage market is held by private lenders, a 37.8% increase compared to the same quarter last year. This is the sixth consecutive quarter we saw this share grow, sending it to the highest level in at least a decade. It really starts spiking in the second half of 2017, just when prices took a breather, but the fear of being locked out of the market forever remained. Stress testing under B-20 Guidelines only became mandatory on January 1, 2018.
Canadian Private Lenders See Over $2 Billion Of Mortgage Originations In 2017
The dollar value of private mortgage originations in the first quarter of 2017 is just off of the high. The first quarter of 2018 saw $2.09 billion worth of originations at private lenders, 2.95% higher than last year. BoC analysts pointed out that private lending originations are stable at just over $2 billion per quarter. In contrast, other sources have been declining. Despite the steady level of originations, the rate of growth is tapering.
Mortgage Originations By Private Lenders In Ontario
Still, at $2 billion per quarter in originations, there’s a lot of Canadians willing to pay steep rates for homeownership. The steep rates make it extremely difficult to actually make a profit on that home. More important, how many people rushed into homeownership before they were financially prepared?
Note: The Bank of Canada only used Ontario to provide their insights, due to a lack of data in the rest of the country. Yes, not even the BoC is able to get their hands on the data needed to figure out how many private mortgages are in Canada.