Private mortgage lenders are refusing to renew loans to their existing borrowers, leaving indebted homeowners without a source of funding.
Canadian Mortgages Inc., CMLS Financial, New Haven Mortgage Corp. and individual private lenders are some of those who have turned down requests to renew some of their borrowers’ loans after home prices tanked over this past year.
This is taking place in areas where home prices have dropped significantly. That includes Owen Sound, Bowmanville, Orillia, Timmins, Hamilton and Brampton in Ontario and Prince Rupert in British Columbia.
Private lenders are nervous they won’t be able to recoup their capital if borrowers are unable to make their monthly payments. Private lending is typically determined using a metric called the loan-to-value (LTV) ratio, which measures how much the homeowner owes relative to the appraised value of the property.
The more debt the homeowner owes, the higher the ratio and the riskier it is for the lender. That is because the lender will have a lower chance of making a profit if the borrower stops making payments and the lender has to foreclose on the property and sell it. Currently, many private lenders are only willing to lend up to 75 per cent of the property’s value – also known as an LTV ratio of 75 per cent. When home prices were soaring in 2021, private lenders were willing to offer loans with an LTV ratio of 90 per cent.
Now that home prices have dropped, that has increased the risk to the lender and they are no longer willing to renew loans. When borrowers try to renew their mortgage, the lender is either refusing to renew their loan or telling borrowers that their properties need to be reappraised. And when the property is reappraised, it has a much lower value.
“Some homeowners are forced to get appraisals and the values are not coming in. It’s a mess,” said Samantha Brookes, chief executive of mortgage brokerage Mortgages of Canada.
One of Ms. Brookes’s clients bought a property in Bowmanville in 2021. He is self employed and was not able to get a loan from a bank. He got two mortgages with two private lenders that amounted to $3,000 in monthly payments. He had been making his payments on time but his lenders said they were not willing to renew. Ms. Brookes said her client’s options are dismal. The loans are much more expensive and the monthly payments range from $7,400 per month to $8,600.
Other mortgage brokers are facing similar situations with distressed homeowners. Tuli Parubets said she got a call from a homeowner who had a property outside of Prince Edward County, a recreational region in Ontario where home prices nearly doubled in the first two years of the pandemic.
When the homeowner first took out the loan, it had a 65 per cent LTV ratio. She was paying an 8.99 per cent interest rate on her mortgage. Now that home prices have dropped, the LTV has jumped to 80 per cent. The private lender is refusing to renew and Ms. Parubets said her client has scant options.
“She doesn’t have a lot of recourse,” said Ms. Parubets, a mortgage agent with the Mortgage Scout. “If you sell, you’re not getting any money out of this property,” she said.
Homeowners who borrow from private lenders typically have not been able to qualify for a loan from a bank, which have cheaper mortgages but stricter requirements. That includes requiring borrowers to undergo the mortgage stress test and prove they have enough employment income to cover their monthly payments at an interest rate that is at least two percentage points higher than their actual mortgage contract.
Banks are currently offering five-year fixed mortgages with an interest rate around 5 per cent. In comparison, some private lenders are charging as much as 12.99 per cent in interest for a one-year mortgage.
The federal mortgage stress test has pushed a swath of borrowers to private lenders including Mortgage Investment Corporations such as Canadian Mortgages Inc. (CMI), which do not have to apply the stress test. They rely on funds from investors, as well as funds repaid by their borrowers, to provide new mortgages. Private lenders can also be individuals and they use their own funds, including funding from their Registered Retirement Savings Plan, to provide the mortgage.
Canadian Mortgages Inc., which has been rejecting some renewals, did not directly answer a question as to why it was no longer renewing loans for some of its clients. Its executive vice-president Elizabeth Wood said the lender’s underwriting decisions are decided case by case to protect the interest of all parties involved. She said when a mortgage is up for renewal, CMI analyzes the file to “determine the ongoing suitability,” and that the analysis can include “updated valuations, as well as relevant market information.”
CMLS, a commercial and residential mortgage lender with offices across the country, did not respond to a request for comment. New Haven, a private mortgage company that lends in Ontario, did not comment.
Some individuals have been using Olympia Trust to help administer their mortgage. Olympia is a financial institution that helps individuals invest their funds into alternative investments such as private mortgages. Olympia said borrowers may not know that there is an individual providing the loan, not Olympia Trust. Olympia charges fees to facilitate the mortgage loan such as allowing the borrower to pay their monthly payment to the private lender.
Craig Skauge, CEO of Olympia Trust, said: “It is the account holder saying ‘I am not going to do it any more,’ ” he said. “There’s no question that investors are spooked.”
Because private lenders will not provide a mortgage with an LTV ratio greater than 75 per cent, some indebted homeowners will have an even harder time obtaining a mortgage. That is because the value of their property dropped and pushed up their LTV ratio above 75 per cent.
For example: A borrower made a down payment of $125,000 on a property that was valued at $500,000 early last year. The homeowner had to borrow $375,000. That means the loan accounted for 75 per cent of the property’s value and the property had a LTV ratio of 75 per cent.
If the value of property dropped by 20 per cent – as it has in many places in Canada – the value of the property is now $400,000. That means the loan now accounts for 94 per cent of the property’s value.
“You are going to see borrowers left in the lurch where nobody will take them because everyone’s guidelines say they won’t go over 75 per cent LTV. So if you are over that, you are untouchable,” said Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global.
Private lenders rein in real estate borrowers
Private mortgage lenders raise qualification standards, reducing options for weakest borrowers