Yahoo Finance New mortgage rules a boost for private lenders — but be careful
New mortgage “stress test” rules coming into play at the end of November may raise the bar on loan eligibility but unfortunately it isn’t stopping Canadians from turning to the unregulated, private mortgage lending market to top up the buying power.
“I wouldn’t go as far as to say everybody is doing it but I’ve definitely seen an uptick,” says Michael Sugar, a mortgage broker who started focusing on the private lending sphere more than a decade ago. “Prior to 2008, there wasn’t a lot of (private mortgages) required because the banks were funding everything, so the only people that needed it were people with really bad credit… it really is considered to be a last resort type thing.”
But the tightening of rules and guidelines combined with the growing number of self-employed and contract-based workforce is shifting borrowers who would typically be considered “A” clients into the “B” category, says Sugar. The broker says about 65 per cent of his clients are getting their loans through private lenders, predominantly high net-worth individuals who offer one or two year loans at interest rates around 10 to 12 per cent.
According to a research note from last year by CIBC economist Benjamin Tal, unregulated lenders only make up around five per cent of the market but they doubled their footprint between 2012 and 2015.
Bill Whyte, senior vice president and chief of member experience at Meridian Credit Union, says they typically advise their members against delving into the alternative lending sphere.
“If our members come to us and they don’t qualify, we try to not refer them that way at all,” he explains. “We say it would be better to sit back, save some more money, work on your credit.”
The credit union will sometimes offer a restoration credit mortgage for those with bad credit where interest is in the five to six per cent range as opposed to the 2.44 per cent for members in better standing.
Sugar admits that private lending isn’t a long-term solution for anxious home-seekers looking to get into the market so much as a bandaid.
“Always discuss an exit strategy… you’re in the position where you are right now (but) we don’t want you to be like this for the next five to ten yeas,” he says. It’s not just the high interest rates that present some challenges; for the most part private mortgages cost more to borrow than their more mainstream counterparts.
“Appraisal fees, broker fees, lender fees… in a private mortgage transaction the client usually paying for two sets of legal fees, the lender’s legal fees and their own legal fees,” he explains. Missed payment fees can sit around $250 to $300. And then there’s always the chance that the lender could ask for their money back after one year, though Sugar says that’s usually not the case as they see it as an investment with attractive 10 to 12 per cent returns.
Regardless, Sugar suspects the private mortgage market will continue to thrive as borrowers look for alternative ways to gather the capital to buy their home.
“First time homebuyers that were approved and would take a five year term at 2.5 per cent (now have) to qualify at a higher rate of 4.64 per cent,” he says. “So the people that qualified for a mortgage of $500,000 now can only afford a $420,000 mortgage – they’ll get a first mortgage for a lesser amount and then go to the private lender for the difference… the new regulations were a surprise to the whole industry.”
