The value of Canada’s non-bank residential mortgages skyrocketed by more than 10 times in the period 2007-2018, according to Statistics Canada data released last week – a much more rapid increase than residential property values.
The data suggest that more and more residential mortgage consumers have been turning away from the big banks and credit unions to take up the options offered by alternative lenders.
Statistics Canada found that the value of all non-bank mortgage loans ballooned by 924.2 per cent in the 11-year period of the study. In that same period, the composite benchmark home price in Canada increased 81.8 per cent from $337,900 in January 2007 to $614,400 in December 2018, according to the Canadian Real Estate Association.
Non-bank mortgage lending can largely be split into two categories – mortgage finance corporations (MFCs) and mortgage investment corporations (MICs). MFCs include monoline lenders that specialize in mortgages, but are regulated in exactly the same way as bank mortgages, while MICs include private mortgage lenders that are not subject to the same regulations, and tend to offer uninsured, shorter-term, interest-only loans at higher rates.
According to an analysis of Statistics Canada’s data by housing blog Better Dwelling, the MFC market has exploded, turning from a small industry into a huge one since 2007, with assets increasing 7,606 per cent in that time.
The MIC market, which is a smaller segment that includes private mortgage lenders, saw assets more than triple during the same period, said Statistics Canada.
So why has the value of Canadian non-bank mortgages risen so much faster than the value of Canadian homes during that time?
Taylor Little, CEO of private lender Neighbourhood Holdings, told Glacier Media that a steady string of tightening in the mortgage regulatory system was largely the cause of the increase in non-bank lending, especially in the private lending space.
He said, “Coming out of the financial crisis, we start to see mortgage rules change and tightening. Starting around 2010, we really see more aggressive changes, ending in the [2018] stress test, which is the big one. For example, in 2010, they increased the minimum down payment for an uninsured mortgage to 10 per cent. And then in 2011 the maximum amortization period was shortened from 35 years to 30, and then again later to 25 years. So you can start to see the gradual tightening in mortgage policy.”
Little said that these tighter rules caused many borrowers to turn to private lenders for short-term loans to enable them to buy their homes while they got their affairs in order, prior to taking out a long-term regulated mortgage. He added that the increase in the gig economy, with borrowers’ fluctuating incomes coming from different and variable sources, has also boosted the private lending space (more on that here).
All of this, combined with the near-doubling in Canadian benchmark home prices over the same time, has caused the private lending sector to boom, said Little. “What you’re seeing as a general trajectory is a lot of change in this marketplace during this period,” he added.
Alisa Aragon, mortgage broker with Dominion Lending Centres Mountain View, told Glacier Media that the larger market of monoline lenders has exploded in recent years for the same reasons. The tightening of regulations, culminating in the mortgage stress test in January 2018, combined with the erosion of housing affordability for many buyers, has created huge opportunity in the mortgage market for more competition against the big banks and credit unions.
She said, “Monoline lenders offer mortgages that are regulated in the same way as banks, but they specialize in providing mortgages only, they don’t offer savings accounts or credit cards. They are able to offer competitive interest rates, and often with better terms, such as lower pre-payment penalties.”
Aragon added that another key factor in this sector’s increase is the growth in consumer use of mortgage brokers, who have access to all the possible borrowing options for their clients, including monoline and private lenders. She said consumers who do not use mortgage brokers tend to focus on the big banks and are less aware of all their options, but the recent increased use of mortgage brokers, along with the explosion in online research tools, has opened up all the lending alternatives to the average consumer.
