Private mortgage lenders have a harder time accessing capital and making it harder for borrowers to get a loan, choking off an important source of funds for those who can’t qualify at a Canadian bank.
Some private mortgage lenders, also known as subprime or alternative lenders, require borrowers to have higher down payments or more equity in their homes to qualify for a private mortgage. The higher standards are being implemented as Canadian banks tighten lending in the face of falling home prices and rising interest rates. That has sent a flood of new borrowers to private lenders and bolstered their business.
MCF Mortgage Investment Corp., which makes loans to Ontario homeowners, had to suspend new loan applications for two weeks in October because it was inundated with new borrower applicants.
Like a mortgage investment corporation, or MIC, the lender uses investors’ capital, as well as funds that have been repaid by its borrowers, to make new mortgages.
“When we need capital, we don’t just go down to the floor and organize an extra billion dollars. Everything comes directly from private clients,” said Rob Pirie, CEO of MCF Mortgage. “Sometimes we just run out of capital, it only takes a few weeks or a month to build that new capital. It’s nothing to worry about at all.” The two-week October suspension was only the second suspension for him in nearly five decades in the business.
MCF Mortgage said it has a strong investor base. But like other PRMs, some of its capital comes from when its borrowers pay off their loans. PRM mortgages are more expensive than those from licensed banks and are generally used by borrowers as a stopgap measure so they can improve their creditworthiness and finances to eventually qualify for a cheaper mortgage from a bank.
But many borrowers have been unable to make the leap to major Canadian banks. This is because banks are regulated by the federal government and must apply stress test rules to ensure that borrowers can make their monthly mortgage payment at an interest rate that is at least two percentage points higher than their actual contract.
Now that the median mortgage rate is above 5 percent, borrowers must show that they can make their mortgage payments at an interest rate of about 7 percent. That has made it harder for borrowers to qualify for a bank loan. As a result, some borrowers may have no choice but to stay with their current lender, even if the mortgage is more expensive.
At MCF Mortgage, borrowers typically walked out after paying off their loan in about two years. Now borrowers are staying with MCF longer, Pirie said.
It’s not just MCF Mortgage that has had to limit applicants. Over the summer, Magenta Capital Corp. suspended new loan applications. Magenta, which makes loans throughout southern Ontario, resumed accepting new loan applications in September but tightened its standards.
Magenta and other private lenders are also hedging their businesses against a cooling housing market, where the country’s typical home price has fallen 9 percent since the central bank embarked on its campaign to curb inflation.
Many of the private subprime lenders now require borrowers to have more equity in their homes to qualify for a mortgage. Subprime lenders used to lend up to 90 percent of the home’s value. Now, many private lenders are only willing to lend up to 75 percent of the property’s value, also known as loan-to-value, or LTV. That means lenders have a bigger cushion if the loan defaults.
At Atrium MIC, which lends mortgages in southern Ontario, loans with a maximum LTV of 75 percent and above are currently unavailable, according to its website. The website also said that one of the mortgages still available required an LTV of 65 percent or less. Atrium did not respond to requests for comment.
Magenta said it has lowered its LTV ratio on second mortgages. “We adjusted our underwriting criteria to accommodate rising interest rates,” Magenta COO Albert Oppenheimer said in an emailed statement.
Alta West Capital, which offers alternative mortgages in British Columbia, Alberta and Ontario, lowered its maximum LTV ratio from 85% to 75%. In addition, the lender is more selective about who it lends to and is doing more work on its home appraisals, Alta West President Charles McKitrick said.
Canadian Mortgages Inc. (CMI) has also lowered its maximum LTV ratio, from 80% to 75%. CMI Executive Vice President Elizabeth Wood said the lender makes sure its loans reflect market conditions.
Home values have lost at least 20 percent of their value in the areas that appreciated the most, including suburban Toronto and smaller cities in southern Ontario.
Each interest rate increase makes it increasingly difficult for borrowers to qualify with major banks, thus tranching borrowers into the alternative lending space, Magenta’s Mr. Oppenheimer said.
Despite stricter standards, PRMs have seen increased demand from borrowers. The amount of assets under management in MICs grew 22 percent to $14 billion in the second quarter of this year compared to the same period in 2021, according to investment research firm Fundamental Research Corp. During the same period , the value of all outstanding mortgage assets in the country rose 10 percent to $2 trillion.
In the prior year, MIC’s assets under management rose 2 percent to $11 billion, while all outstanding mortgages rose 9 percent to $1.8 trillion, according to Fundamental research.
“This year, the situation has changed. Many borrowers are coming to the MICs,” said Siddharth Rajeev, who heads Fundamental’s research department, adding that mortgage stress has pushed more borrowers out of the prime lending space and into subprime loans.