Mortgage brokers and alternative lenders are playing a bigger role in B.C.’s residential real estate sector, as cost-conscious homebuyers seek more financing options and turn to non-traditional products that suit their needs, goals and wealth strategies.
Mortgage brokers are no longer just for “B” clients who are self-employed or have cash-flow issues or derogatory credit reports, experts said. Even “A” households with dual incomes and sizable down payments are turning to brokers, sometimes years in advance of a home purchase.
Meanwhile, alternative mortgage products have shed their stigma and are increasingly prevalent, especially for short-term strategies or shortfalls. The disparity between interest rates on traditional versus non-traditional mortgages has narrowed, as industry players grow in size and sophistication.
But these shifts present potential risks such as opaque compensation, high fees, conflicts of interest and predatory lending practices. Still, experts agreed that brokers and non-traditional lenders add value and exist for intelligible reasons.
“The alternative space has definitely grown over the years,” said Eddy Cocciollo, president of Dominion Lending Centres and DLCG Mortgage Group.
According to Canada Mortgage and Housing Corp. (CMHC), 48 per cent of Canadian homebuyers relied on a broker in 2024 to manage their mortgage negotiations, up from 43 per cent in 2023.
Meanwhile, the value of outstanding residential mortgages issued or held by non-bank lenders rose 19 per cent from $338 billion in Q3 2020 to $401 billion in Q3 2024, according to the latest data from Statistics Canada.
“Alternative banks ... have been seeing an increase, definitely, in volumes over the years, and I think that trend will continue, especially because qualification is not getting any easier. I think Canadians are becoming more stretched,” said Cocciollo.
Mortgage brokers are trusted intermediaries
Mortgage brokers deliver unbiased advice because they are not representing just one label or brand, said Rebecca Casey, president of Canadian Mortgage Brokers Association - British Columbia (CMBA-BC).
“More people are feeling that they want to shop around, they want better advice, better guidance, a better client experience, so more people are turning towards mortgage brokers as opposed to walking into their bank branch these days,” she said.
In addition to helping clients save money, brokers—who, unlike banks, focus solely on mortgages—can advise on things like federal stress tests, provincial property transfer tax exemptions, prepayment penalty charges, mortgage flexibility and the ease of use of online portals, she said.
According to regulator BC Financial Services Authority (BCFSA), an individual commonly referred to as a “mortgage broker” is technically a “sub-mortgage broker.” As of January 1, the province had 5,830 sub-mortgage brokers (individuals who offer mortgage services in B.C. and work for brokerages or mortgage brokerages) and 1,322 entities and brokerages called “mortgage brokers” by BCFSA.
In order to become licensed, there are education, language and other requirements. For example, a popular choice is to complete a mortgage brokerage course offered by the University of British Columbia Sauder School of Business.
Once licensed, the regulatory model is similar to that for real estate agents: Each broker hangs their licence with a brokerage, and each brokerage is part of a network, said CMBA-BC’s Casey.
The regulatory framework will soon be changing. The Mortgage Services Act (MSA) was passed into law on November 3, 2022, and once in force, will repeal and replace the Mortgage Brokers Act (MBA). The MSA will introduce a new disciplinary framework and updated licensing requirements for the mortgage services industry.
B.C.’s Ministry of Finance is currently working to develop the rules and regulations that will accompany the MSA, according to a statement from BCFSA.
Alternative loans can be used strategically
Although alternative mortgage products may come with higher interest rates and no cash-back or other specials, experts said they offer considerable value to some borrowers.
For example, Casey said people who have a corporation and pay themselves a modest salary may not have enough personal income to qualify for a traditional mortgage. An alternative solution could allow them to qualify for more mortgage without having to pay a substantial amount of income tax.
“The increased interest rate is actually cheaper than the personal income taxes they would have to pay to qualify,” she said.
Dean Koeller, board chair of Canadian Alternative Mortgage Lenders Association (CAMLA), said alternative mortgage products are intended for what can be called “non-bankable” transactions. This could be for reasons related to underwriting rules, credit scores or income taxes owed, or the borrower may have exceeded the maximum amount of mortgages that the bank will allow through a single mortgage-holder.
Another raison d’être is to facilitate time-sensitive transactions. Closing a traditional mortgage transaction can be time-consuming, and completing a deal quickly may be one reason why a consumer may use an alternative product, Koeller said.
Alternative lenders, who must comply with securities, anti-money-laundering (as of October 11 last year) and other regulations, can also provide the capital for equity take-outs, or the funds needed to close on a new home when one’s old place hasn’t yet sold, staving off default and litigation.
“Mortgage-holders in our products tend to be between 18 and 24 months in length of time that they are using our products, so it’s a much shorter timeframe than you’d be with a bank or a credit union,” he said. “We really focus on the short-term opportunities and then transition people back into the bank where it makes sense and where it’s possible.”
According to Koeller, most rates in his industry are fixed in order to minimize shareholder risk, due to the absence of CMHC or other insurance. He also said the rate variance with traditional banks has narrowed over the past decade, with alternative rates now around 100 to 300 basis points higher, depending on borrower characteristics and risk factors.
Risks include misconduct, conflicts of interest
Mortgage brokers do a lot of prime business, and are generally paid a finder’s fee, or commission, by the lender with whom the deal is placed. If there is a small or non-existent commission, the broker may also charge fees to the borrower, especially those with complex circumstances that require more time and expertise, said Cocciollo.
In a statement, BCFSA said the Business Practices and Consumer Protection Act prohibits mortgage brokers from charging any fees for arranging a consumer mortgage in British Columbia, unless those fees are deducted from the mortgage advance at time of funding.
Such fees have sometimes resulted in confusion and consumer complaints.
“A lack of transparency regarding fees, compensation structures and mortgage terms are among the common issues we address,” said Raheel Humayun, director of investigations with BCFSA.
Furthermore, there is a concern that brokers could be directing clients to specific lenders with which they have an undisclosed relationship.
As a result, BCFSA said the MBA requires that mortgage brokers disclose all potential conflicts of interest to borrowers and lenders, including both direct and indirect interests, including their commission, to both borrowers and lenders to ensure transparency.
On the fringes of this space, there may even be a risk of loan sharks or criminal interest rates, which were lowered on January 1 to an annual percentage rate exceeding 35 per cent, down from the previous 48-per-cent threshold.
“I think that’s why you work with a mortgage broker, to avoid any sort of hazardous or malicious type of financing,” said CMBA-BC’s Casey.
“I think most mortgage brokers would argue that they work really hard to uphold the values and the level of professionalism and protect our consumers, because that is the future of our industry.”
.png;w=120;h=80;mode=crop)
