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Canada's Mortgage Experts

Alternative lenders gain market share as total mortgage growth slows, CMHC says

July 26, 2019 | Posted by: Aaron Baxandall

Alternative lenders held $13–14B of outstanding mortgages last year

Aleksandra Sagan, Canadian Press July 16, 2019

An increasing number of homeowners turned to alternative lenders last year, while new mortgage growth reached its slowest pace in more than a quarter of a century amid government interventions aimed at cooling the housing market, according to a new report.

Alternative lenders, which take on clients with riskier profiles for shorter terms at higher interest rates, held 1% of Canadian mortgages last year, according to a first-of-its kind report from the Canada Mortgage and Housing Corporation.

There were 200 to 300 active alternative lenders in Canada last year holding $13 billion to $14 billion of outstanding Canadian mortgages. That's up from $11 billion to $12 billion the year prior and $8 billion to $10 billion in 2016.

The data suggests that 'their share in this space is growing,' said Tania Bourassa-Ochoa, a specialist in housing research with CMHC.

Loans from alternative lenders typically have terms between six months and two years. In 2018, they offered interest rates between 7.3 and 11%, with an average of 8.99%. Banks, by contrast, offered 3.3% to 5.4% rates on mortgage loans with terms that generally last several years.

People who turn to alternative lenders have riskier profiles, according to the report. Their clientele includes people who are self-employed, investors carrying more than one property, and borrowers who need short-term cash due to poor credit history, health problems, divorce or other issues.

Such mortgages have higher delinquency rates than those given by other lenders. In the third quarter of 2018, the delinquency rate for alternative lenders was 1.93%, according to the report. Mortgage finance companies, credit unions, caisses populaires and banks all reported delinquency rates at 0.25% or lower during that same time.

An April report from CIBC's deputy chief economist raised concerns over the rise in alternative lenders in Ontario. In 2018, alternative lenders made up nearly 12% of transactions in Ontario and about 15% in Greater Toronto, according to the report. That represented a roughly 2% rise since Ottawa's new mortgage stress test for traditional lenders came into play.

Alternative lenders account for close to 7% of the market based on dollars, since average loan size is about half the size of bank loans.

Benjamin Tal said at the time that alternative lending is part of a normally functioning mortgage market, but a fast-growing segment is not.

A 1% market share is still a relatively small figure, said Bourassa-Ochoa.

'We're going to have to monitor how these numbers are changing in time in order to really see and understand more clearly if there is a vulnerability and what it is.'

Last year also saw the slowest year-over-year growth in total mortgage debt in more than 25 years, according to the report. Throughout 2018, mortgage debt grew by between 3.4% and 5.2% with the pace maintaining at 3.4% in the first quarter of this year. That's down from between 5.2% and 6.2% in 2017 and 6.1 to 6.5% in 2016.

That decline comes from tougher government lending rules, higher borrowing costs and other factors.

This is the first report of its kind by the CMHC, which plans to produce it on an annual basis and provide quarterly updates.

'This report is really looking at filling so many missing pieces of the residential mortgage landscape,' said Bourassa-Ochoa, adding businesses, policy makers and others can use the data to make more informed decisions.

CMHC's report comes on the heels of a similar effort by Statistics Canada. The agency last week released its first set of data from a survey of non-bank mortgage lenders.

It noted this data was previously 'only collected by some organizations at the provincial level, for certain industries and with varying levels of detail.'

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