Private mortgages could be adding risk to the Canadian mortgage market say regulators
Private non-bank mortgage loans are growing in popularity for residential real estate lending in Canada, especially as interest rates rise and mortgage rules tighten. -Financial Post
These loans have higher lender fees and interest-only payment options, are often riskier and prone to defaults, and are considered part of the shadow banking sector, which is exempt from banking regulation.
The terms and true costs of private mortgage loans are often misunderstood by borrowers who take them, and a growing number of Canadians are holding onto them for longer.
According to data from the Financial Services Regulatory Authority of Ontario (FSRA), private non-bank mortgages in Ontario surged 72% to $22.4 billion in two years, capturing 10.6% of the market by 2021.
Mortgage Investment Entities, which include mortgage investment corporations and other private non-bank lenders that provide short-term loans with higher interest rates to borrowers who don’t qualify with traditional lenders, originated 10.2% of residential mortgages in Q3 2022.
Mortgage investment companies outpaced overall mortgage debt growth in Canada in Q2 2022.
The private mortgage market is attracting a higher number of borrowers who were not able to qualify with traditional lenders in the context of rapidly rising interest rates, due to mortgage stress tests, which became more onerous as the Bank of Canada’s overnight rate climbed to 4.5% in January 2023 from 0.25% a year earlier.
According to Seamus Benwell, a senior economics analyst at CMHC, not only are more people are using private mortgages, about a third of them are staying in the unregulated market for longer than they have in the past.
Private mortgages should be used only as a short-term stopgap, not a long-term solution, due to their sometimes burdensome terms and conditions, which are often misunderstood, according to FSRA’s executive vice-president of market conduct.
While private mortgages can be good for competition in the financial services sector, allowing borrowers to overextend themselves, either through insufficient income verification or through certain loan features, can be risky, according to Andrey Pavlov, a professor of finance at British Columbia’s Simon Fraser University who specializes in risk management and real estate.
“In many cases, you are only paying the interest on a private mortgage. This means you’re not actually paying off any principal.”
See the full story here: https://financialpost.com/real-estate/mortgages/private-mortgage-risk-flagged-regulators-growth-shadow-banking
