Private mortgage lenders are having a harder time accessing capital and are making it more difficult for borrowers to get a loan, choking off a major source of funds for those unable to qualify at a Canadian bank.
Some private mortgage lenders, also known as alternative or subprime lenders, are requiring borrowers to have higher down payments or more equity in their homes to qualify for a private mortgage. The higher standards are being rolled out as Canadian banks clamp down on lending in the face of falling home prices and rising interest rates. That has sent a flood of new borrowers to private lenders and shored up their business.
MCF Mortgage Investment Corp., which provides loans to Ontario homeowners, had to suspend new loan applications for two weeks in October because it was inundated with new borrower applicants.
As a mortgage investment corporation, or MIC, the lender uses capital from investors, as well as funds that have been repaid by its borrowers to provide new mortgages.
“When we need capital, we don’t just go down to the trading floor and organize an extra billion dollars. It’s all directly from private clients,” said Rob Pirie, MCF Mortgage’s chief executive officer. “Sometimes we just run out of capital, it just takes a few weeks or a month to sort of build that new capital up. It’s not anything that was concerning at all.” The two-week October suspension was only its second suspension in nearly five decades in business.
MCF Mortgage said it has a healthy investor base. But like other MICs, part of its capital comes when its borrowers repay their loans. Mortgages from MICs are more expensive than those from chartered banks and borrowers typically use them as a stopgap measure so they can improve their creditworthiness and finances in order to eventually qualify for a cheaper mortgage from a bank.
But many borrowers have not been able to make the leap to the major Canadian banks. That is because banks are federally regulated and must apply stress test rules ensuring borrowers can make their monthly mortgage payment at an interest rate that is at least two percentage points higher than their actual contract.
Now that the average mortgage rate is above 5 per cent, borrowers must prove they can make their mortgage payments at an interest rate of around 7 per cent. That has made it harder for borrowers to qualify for a bank loan. Consequently, some borrowers may have no choice but to stay with their current lender even if the mortgage is more expensive.
At MCF Mortgage, borrowers used to exit after fully repaying their loan in about two years. Now, borrowers are staying with MCF longer, Mr. Pirie said.
It’s not just MCF Mortgage that has had to limit applicants. Over the summer, Magenta Capital Corp. suspended new loan applications. Magenta, which lends throughout Southern Ontario, resumed taking new loan applications in September but tightened its standards.
Magenta and other private lenders are also protecting their business against the cooling housing market, where the country’s typical home price has dropped 9 per cent since the central bank embarked on its campaign to slow inflation.
Many of the private subprime lenders are now requiring borrowers to have more equity in their homes in order to qualify for a mortgage. Subprime lenders used to lend up to 90 per cent of the value of the home. Now, many private lenders are only willing to lend up to 75 per cent of the property’s value – also known as the loan-to-value or LTV ratio. That means lenders have a larger cushion if the loan defaults.
At Atrium MIC, which provides mortgages in Southern Ontario, loans with a maximum LTV of 75 per cent and above are currently not available, according to its website. The website also said one of the mortgages still available required an LTV of 65 per cent or below. Atrium did not respond to requests for comment.
Magenta said it has lowered its LTV ratio on second mortgages. “We adjusted our underwriting criteria to accommodate the increase in interest rates,” Magenta chief operating officer, Albert Oppenheimer, said in an e-mailed statement.
Alta West Capital, which provides alternative mortgages in British Columbia, Alberta and Ontario, reduced its maximum LTV ratio to 75 per cent from 85 per cent. As well, the lender is more selective on who they lend to and is conducting more work on their home appraisals, said Alta West chairman Charles McKitrick.
Canadian Mortgages Inc. (CMI) has also reduced its maximum LTV ratio, to 75 per cent from 80 per cent. CMI executive vice-president Elizabeth Wood said the lender ensures that its lending reflects market conditions.
Home values have lost at least 20 per cent of their value in areas that appreciated the most, including Toronto suburbs and smaller cities in Southern Ontario.
Every interest-rate increase makes it increasingly difficult for borrowers to qualify with the major banks, therefore shifting tranches of borrowers into the alternative lending space, Magenta’s Mr. Oppenheimer said.
Despite the tougher standards, MICs have seen increased demand from borrowers. The amount of assets under management at MICs grew 22 per cent to $14-billion in the second quarter of this year compared with the same period in 2021, according to investment research firm Fundamental Research Corp. Over the same period, the value of all outstanding mortgages in the country increased by 10 per cent to $2-trillion.
In the previous year, MIC assets under management rose 2 per cent to $11-billion, while all outstanding mortgages increased by 9 per cent to $1.8-trillion, according to Fundamental’s research.
“This year, the situation has changed. A lot of borrowers are coming to MICs,” said Siddharth Rajeev, who heads Fundamental’s research department, adding that the mortgage stress has pushed more borrowers out of the prime lending space and into subprime.
Rachelle Younglai