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A house is for sale in Ottawa, Ont., on April 13.Spencer Colby/The Globe and Mail

Magenta Capital Corp., one of Canada’s largest private mortgage lenders, has suspended new loan applications until September, according to an e-mail to its broker clients viewed by The Globe and Mail.

It’s an unexpected move for a lender that has grown rapidly during the pandemic’s real estate boom. The suspension was announced less than a week after the Bank of Canada raised its benchmark interest rate by another 50 basis points, for a total increase of 125 basis points in four months. (A basis point is a hundredth of a percentage point.)

The sharp increase in interest rates has made it harder for borrowers to qualify for a loan from a chartered bank, which typically offers the lowest mortgage rate but has stricter borrowing requirements. Additionally, because borrowers qualify for less from a bank, they are increasingly seeking out alternative lenders such as mortgage investment corporations, or MICs, which pool investor funds to provide loans and are not subject to the same restrictions as chartered banks.

In the e-mail to clients dated June 7, Magenta said it will not be accepting any new applications that required funding before Sept. 1. It did not explicitly give a reason for the move.

The company’s note largely praised its growth and said it exceeded its own expectations. However, Magenta’s chief operating officer Albert Oppenheimer acknowledged the disruption, saying: “I understand that this is an inconvenience for you and your clients.”

Magenta did not respond to multiple requests for comment.

The lender may be taking a break because the mortgage demand exceeds the amount of capital it has available to lend and investors are not chipping in as much new funding to meet the demand.

The Magenta e-mail called this year “a success” and said that “extremely favourable market conditions” allowed the MIC to “grow at an unprecedented rate and much ahead of schedule.”

Magenta was established in 1994 and is one of the country’s oldest and largest MICs, with $430-million in mortgage assets under management. It provides loans to what it calls borrowers with “short-term credit challenges” and lends throughout Southern Ontario, where home prices have nearly doubled in some areas in the past two years.

Under the federal mortgage stress test, homebuyers who borrow money from a bank must prove they can make their loan payments at an interest rate that is at least two percentage points higher than their contract rate.

With the cost of a traditional fixed-rate mortgage doubling in the past year, that has made the stress test more difficult. The interest rate on a five-year fixed mortgage reached 4.41 per cent last week, according to central bank data. That means under the stress test rules, the borrower must prove they can make their payments at an interest rate of 6.41 per cent.

Borrowers are not subject to the mortgage stress test at MICs and other non-bank lenders.

“When rates go up, less people qualify, so therefore we get more business because of that,” said Nick Kyprianou, chief executive officer with RiverRock MIC.

Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global, said some lenders may be taking a temporary break to figure out the market. In 2017, ahead of the implementation of the mortgage stress test for uninsured mortgages, she said lenders took some time to assess the landscape.

Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try and keep inflation to a target of 2%. But it’s a careful balance between controlling inflation and not tipping the economy into a recession. Note - since this video was published in June, inflation has risen to 8.1% in July.

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