Non-bank lenders taking a bigger bite out of Canada's mortgage market, CMHC says

An increasing number of homeowners turned to alternative lenders last year, while new mortgage growth reached its slowest pace in more than a quarter of a century amid government interventions aimed at cooling the housing market, according to a new report.

Alternative lenders, which take on clients with riskier profiles for shorter terms at higher interest rates, held one per cent of Canadian mortgages last year, according to a first-of-its kind report from the Canada Mortgage and Housing Corporation.

There were 200 to 300 active alternative lenders in Canada last year holding $13 billion to $14 billion of outstanding Canadian mortgages. That's up from $11 billion to $12 billion the year prior and $8 billion to $10 billion in 2016.

The data suggests that "their share in this space is growing," said Tania Bourassa-Ochoa, a specialist in housing research with CMHC.

Loans from alternative lenders typically have terms between six months and two years. In 2018, they offered interest rates between 7.3 and 11 per cent, with an average of 8.99 per cent. Banks, by contrast, offered 3.3 per cent to 5.4 per cent rates on mortgage loans with terms that generally last several years.

People who turn to alternative lenders have riskier profiles, according to the report. Their clientele includes people who are self-employed, investors carrying more than one property, and borrowers who need short-term cash due to poor credit history, health problems, divorce or other issues.

Such mortgages have higher delinquency rates than those given by other lenders. In the third quarter of 2018, the delinquency rate for alternative lenders was 1.93 per cent, according to the report. Mortgage finance companies, credit unions, caisses populaires and banks all reported delinquency rates at 0.25 per cent or lower during that same time.

"It gives me great concern," said Laurie Campbell, CEO of the non-profit agency Credit Canada, of the rise in alternative lending.

The short terms and high interest rates put people in a vulnerable position, she said, especially if interest rates are rising. It doesn't help that many of these borrowers are people who could not qualify for a bank mortgage, making them higher risk, she said.

They could get into a situation where rates are higher when their term is up and not even alternative lenders will renew their mortgage, she said, forcing them to sell their property.

She suggests people desperate to get into the housing market who fail to be approved by a traditional lender determine what prevents them for qualifying, like a low credit score, and whether it's possible to fix it going forward.

If they do decide to sign a mortgage with an alternative lender, they need to recognize that it's going to cost them a lot more over the long run, she said.

An April report from CIBC's deputy chief economist raised concerns over the rise in alternative lenders in Ontario. In 2018, alternative lenders made up nearly 12 per cent of transactions in Ontario and about 15 per cent in Greater Toronto, according to the report. That represented a roughly two-per-cent rise since Ottawa's new mortgage stress test for traditional lenders came into play.

Alternative lenders account for close to seven per cent of the market based on dollars, since average loan size is about half the size of bank loans.

Benjamin Tal said at the time that alternative lending is part of a normally functioning mortgage market, but a fast-growing segment is not.

A one-per cent market share is still a relatively small figure, said Bourassa-Ochoa.

"We're going to have to monitor how these numbers are changing in time in order to really see and understand more clearly if there is a vulnerability and what it is."

Last year also saw the slowest year-over-year growth in total mortgage debt in more than 25 years, according to the report. Throughout 2018, mortgage debt grew by between 3.4 per cent and 5.2 per cent with the pace maintaining at 3.4 per cent in the first quarter of this year. That's down from between 5.2 per cent and 6.2 per cent in 2017 and 6.1 to 6.5 per cent in 2016.

That decline comes from tougher government lending rules, higher borrowing costs and other factors.

This is the first report of its kind by the CMHC, which plans to produce it on an annual basis and provide quarterly updates.

"This report is really looking at filling so many missing pieces of the residential mortgage landscape," said Bourassa-Ochoa, adding businesses, policy makers and others can use the data to make more informed decisions.

CMHC's report comes on the heels of a similar effort by Statistics Canada. The agency last week released its first set of data from a survey of non-bank mortgage lenders.

It noted this data was previously "only collected by some organizations at the provincial level, for certain industries and with varying levels of detail."