Mortgage rates for subprime borrowers have ticked higher in recent weeks, putting a tighter squeeze on the borrowers who are least able to afford it.
Since alternative mortgage lender Home Capital came under increased scrutiny from regulators in April, the funding crisis that followed has put a lid on the company's ability to offer new mortgages. That in turn has pushed borrowers to other alternative mortgage lenders, charging them more in the process.
In contrast to the big banks, alternative mortgage lenders target borrowers with incomplete credit histories, often because they are new to the country, self-employed or otherwise have ebbs and flows in their income.
Home Capital was far and away the biggest lender in the space, loaning out roughly $5 billion in mortgages in its last fiscal year. Now that the company is on the sidelines, its rivals are being flooded with applications.
But those companies don't have an inexhaustible source of funds either, which is making them choosier about who they'll loan money to, said James Laird, president of mortgage company CanWise Financial.
"They're trying to slow down the flow of applications because they're not able to fund this mass demand," he said.
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A great way for those lenders to rebalance the scales of strong demand and limited supply is to hike rates — and that's exactly what's happening.
Laird says rates on subprime mortgages have inched up between 50 and 150 basis points in the last six weeks — a jump of as much as 1.5 percentage points in some cases, or the difference between a mortgage at three per cent and one at 4.5. Or a bump from five to 6.5 per cent.
Those increases can add up fast.
According to the CMHC, the average Canadian mortgage has $260,826 left on it. At a rate of three per cent, that mortgage would cost a borrower $1,234.35 a month for 25 years. At 4.5 per cent, the monthly payment increases to $1,443.60 — almost $210 extra, and more than $63,000 in additional interest over the life of the loan.
While 97 per cent of CanWise's business is in traditional mortgages, Laird says he has some experience in the alternative space, and he's seen alternative mortgage rates ranging between five and seven per cent as of late.
Contrast that with the average five-year rate at the big banks, which the Bank of Canada currently calculates to be 4.64 per cent. And it's often possible to get them to go even lower, if you have a good credit history.
That doesn't include subprime borrowers, which is why on that end, "consumers ... are looking at significantly higher interest rates than they are used to," Laird said.
Janine White, vice-president of financial services company Kanetix, which operates rate-comparing website RateSupermarket.ca, says the Home Capital reverberations so far aren't having much of an impact on traditional mortgages, but anyone in the subprime or alternative lending space is feeling the pinch.
Subprime borrowers are always going to pay higher rates than conventional mortgages due to the perception of added risk. But in recent weeks, that spread has become larger.
"The gap is getting wider," White said. "You have lenders that are now having a harder time getting funding, and as their funding costs increase, that comes back in the rates they offer.
"At the point of renewal," White said, borrowers "will likely see an increase."
Subprime borrowers seeking money to buy their first homes may simply be priced out of the market as alternative lenders demand a higher rate. Some may turn to private mortgage companies, which charge even higher rates.
But it's an altogether different proposition for subprime borrowers looking to renew their existing mortgages. "Renewals are the borrower I'm most concerned about," Laird said.
If a subprime borrower is still in subprime territory when coming up for renewal, they don't have many options.
They either have to find another alternative lender to loan them the money at a higher rate, or they can go to a private lender, with even higher rates, Laird said.
"And they typically also charge a fee, as well," he said. "It's very expensive borrowing."
Option number three, if they can't find a lender to provide terms they can live with, is the most drastic: Sell the home.
Laird offers that as an extremely rare example of what might theoretically happen amid this squeeze. But it does illustrate the potential knock-on effects of higher rates and fewer loans.
His advice for any first-timers shopping among alternative lenders that suddenly don't like the rates is blunt.
"If you need alternative or private funding to purchase your first home, I'd recommend don't buy your first home," he said. "Rent and save and clean up your credit.
"Get yourself in a better position [because] nobody is forcing you to buy a home. So don't do it."