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Canada’s biggest banks lost market share in mortgage lending in Ontario last year after the federal government introduced its tougher new mortgage qualification rule.

Teranet, which operates Ontario’s electronic land registry system, issued a report Monday saying the Big Five banks had 72.6 per cent of the Ontario market share by dollar value for new mortgages in 2018, a decline from 75.3 per cent in 2017.

Credit unions and private lenders – which are not federally regulated and do not have to apply the new stress-test rule – were the largest beneficiaries, both gaining 0.8 per cent market share in 2018 over 2017.

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Ontario's shifting mortgage market

Percentage of market by mortgage value

Lender group201620172018PP change (2017 to 2018)
Big Five banks73.7%75.3%72.6%-2.7
Credit unions5.1%5.3%6.1%0.8
Insurance companies0.4%0.2%0.2%0.0
Investment firms0.5%0.5%0.6%0.1
Monolines3.6%2.7%2.7%0.0
Other banks7.1%7.5%7.7%0.3
Private lenders4.9%5.8%6.7%0.8
Trust companies4.9%2.7%3.4%0.7

Source: Teranet

There are no national statistics available on market share for all types of mortgage lenders, but the Ontario data offer an indication of the impact of the new mortgage stress-test rule on the lending market. The rule took effect Jan. 1, 2018, and requires federally regulated lenders to ensure borrowers could still afford their mortgages even if interest rates were two percentage points higher than the rate they negotiated.

The Big Banks’ declining market share in 2018 unwound some of the gains they made in Ontario in 2017, when their market share was particularly high compared with other recent years. Over seven years between 2012 and 2018, Canada’s five largest banks have seen their market share in Ontario remain almost flat, climbing by just 0.1 per cent, Teranet said.

But market share for credit unions and private lenders has climbed steadily over the same period, much of it coming at the expense of trust companies, smaller banks and so-called monoline lenders, which are specialized mortgage-lending companies.

Many of those lenders have been impacted by a series of mortgage-rule changes in recent years, including the stress-test rule, either because they are federally regulated financial institutions or because they sell their bundled mortgages to banks and must voluntarily adhere to the underwriting rules as a result.

Private lenders, which are typically individuals and mortgage investment corporations, have not been subject to the same rule changes and have seen their share of the Ontario market climb steadily from 4.4 per cent in 2012 to 6.7 per cent in 2018.

Their gains have been greatest in the province’s eight largest cities, Teranet said, where private lenders had 7.2 per cent of the market in 2018, up from 3.9 per cent in 2012. In Toronto, private lenders had 8.9 per cent of the market in 2018.

Chris Nichilo, founder of private lending firm Magnetic Capital Group, said his firm has seen a “massive uptick” in demand for private mortgages from people who cannot qualify for conventional bank mortgages because of the stress-test rules.

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He said private mortgages have also become better known by borrowers and an increasingly more mainstream option, in much the same way that alternative monoline mortgage financing companies became a more mainstream option a decade ago.

The result is that interest rates charged by private lenders have started to drop as the demand climbs and the industry grows, which is also making the option more appealing.

“It’s becoming a more competitive space – there’s a lot more money in the marketplace than there ever was,” Mr. Nichilo said.

Credit unions, which have historically had a smaller presence in Ontario than many other provinces, have seen their mortgage market share climb almost two percentage points to 6.1 per cent in 2018 from 4.2 per cent in 2012. Their market share has grown the most in smaller centres in Ontario, Teranet said, outside of the eight largest cities.

Teranet said one reason for the big banks’ declining market share in 2018 was a greater number of borrowers who opted to switch away from the big banks when renewing existing mortgages, even though the stress test did not apply for borrowers renewing with the same lender. The number of mortgage “switches” to Big Five banks from other lenders fell 5.5 percentage points in 2018, while the number switching from a Big Five lender to a non-major bank lender climbed by 2.1 percentage points.

Overall, however, Teranet said the number of existing mortgages that either switched to a new lender or refinanced with the same lender was down sharply in 2018, falling 24 per cent over 2017. Teranet said the decline suggests more borrowers waited out the full term of their mortgages last year rather than refinance early, possibly to avoid having to deal with the new stress test.

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