As interest rates rise sharply, it’s not just variable mortgage applicants who are feeling the pain. Alternative lenders, who serve all corners of the lending ecosystem – from consumer borrowers who do not qualify for “A” loans, to private capital for investors and even construction finance – must bring changes to their operations and product offerings, as their access to liquidity is now paramount.
This is because a good portion of alternative mortgages are funded either by deposits or variable debt; therefore, they are directly affected by price changes made by the Bank of Canada, which announced a surprise 1% rate hike last week. This forces lenders to tighten their belts in several ways.
« MIC [Mortgage Investment Companies] are short-term lenders, typically offering terms of six months to two years,” says Hali Noble, Founding Director and Senior Vice President of Broker Relations at Capital of Fisgard.
“With qualifying for higher convention interest becoming more difficult, there has been a drop in payments and an increase in renewal requests. This results in less funds being available to deploy into new mortgages, forcing MICs to raise capital and their underwriting teams to process more applications. »
LILY: Real estate investors ‘fear the trigger’ as Bank of Canada hikes rates
This results in lower loan-to-value ratios offered to borrowers, especially for those buying or trying to build in markets where real estate values are falling.
“Everyone cuts expenses slightly differently,” says Jerome Trail, mortgage broker at The mortgage track, which asserts that lending criteria for those in the GTA can vary significantly from those in outlying markets. “They’re just aware that all price levels are dropping a lot more, and more in those areas than in Toronto; we really see little or no change, for example, in Toronto. It is a full loan to value.
“[Lenders] supersede any niche, and that would include all rural or anything non-metro. Each lender has its own delimitation – 30 km, 50 km, 80 km – of a large metropolitan center of at least 100,000 inhabitants: [for those borrowers] maximum loan-to-value increased from 75% to 65%.”
Some lenders are reducing or completely freezing certain types of products; Fisgard announced last month that it was suspending its construction financing program in Ontario, British Columbia, Manitoba and Alberta. Magenta Capital Corporation, another private mortgage lender, also made headlines when it announced it was freezing all loan applications until after September 1.
This comes at a time when demand for alternative loans is exploding; As the stress test becomes an increasingly difficult hurdle for those applying for conventional lending products, borrowers have turned to the alternative space. Noble says the demand for non-bank financing has “significantly increased” over the past six months.
“Business was buoyant before February when most markets appeared to be peaking, but there is certainly a sense of urgency from mortgage professionals and their clients to get their funding approved and funded as soon as possible. possible,” Noble told STOREYS.
The reality for the alternative lending space – and all borrowers – is the need to acclimate to a normalized cost of borrowing now that the record high interest rate party is over.
Dean Koeller, Chairman of the Board of Canadian Alternative Mortgage Associationindicates that there will be a period of adjustment as the business becomes inherently more risky.
“Over the past five years, the alternative lending industry has experienced some of the lowest losses in its history,” he says. “With rising interest rates and property markets with less demand, we can expect a normalization of losses which over time will put upward pressure on the interest rates offered by lenders. alternatives.”
He adds that the current environment poses new challenges for investors who rely on the alternative lending space, and that those who have the foresight to keep their deals flowing are the most likely to find success, even if the lending costs soar.
“Investors looking for places to invest their capital will have difficult decisions to make. Marketable securities have been very volatile this fiscal year and bond rates don’t offer stability and real inflation-based returns,” he says. “Investors will have to make decisions about risk versus return.”
“The alternative lending industry has performed very well over the past decade and while past performance is no guarantee of future returns, some lenders will do very well over the next few years thanks to the flexible lending options they are able to offer.”
Penelope Graham is the editor of STOREYS. She has over a decade of experience in real estate, mortgages and personal finance. His commentary on the housing market is featured frequently in national and local media, including BNN Bloomberg, CBC, The Toronto Star, National Post and The Globe and Mail.
More from the author