Alternative lending growth gathers pace in Canada

Borrowers are also more likely to stay in the alternative space at term, CMHC report finds

Alternative lending growth gathers pace in Canada

Mortgage investment corporations (MICs) are currently outpacing conventional options in lending growth – and the increasing difficulty of qualifying with a traditional lender is making borrowers likelier to renew in the alternative space, according to a new report by the national housing agency.

Canada Mortgage and Housing Corporation (CMHC) revealed in its residential mortgage industry report for the fall that the country’s top 25 MICs saw their assets under management spike by over 22% in the second quarter, a development it said was probably caused by rising interest rates and the growing inability of borrowers to qualify through more mainstream options.

The percentage of mortgages that remained unpaid at term, and stayed in the alternative space, grew from 29% in Q3 2021 to 33% a year later – a trend that CMHC is keeping an eye on, according to Tania Bourassa-Ochoa (pictured top), senior specialist, economics and a co-author of the report.

“It’s really something that we’re taking a close look at, because for some mortgage borrowers that are staying for a longer period of time in that space and hence paying higher interest rates, maybe affordability can remain an issue for these borrowers who sometimes find themselves in precarious financial situations,” she told Canadian Mortgage Professional. “So it is something that we’re monitoring.”

The growth in assets under management held by the country’s leading MICs significantly outstripped that of conventional lenders, with overall mortgage debt in Canada increasing by nearly 9.75% in Q2 compared with the much larger figure for MICs.

CMHC’s report gathered information from interviews and surveys carried out by the Fundamentals Research Corp. firm, with those revealing that many MICs confirmed their number of loan requests had risen in recent months.

“It’s something that we’re hearing a lot in the field – that there is really this surge in demand for alternative lenders, mostly because many borrowers are not able to get qualified with a traditional lender,” Bourassa-Ochoa said.

Have alternative borrowers made effective exit strategy plans?

Lenders and brokers often stress the importance of borrowers having a viable exit strategy from the alternative space in place – a clear plan to transition from those arrangements to more conventional borrowing options within a given period.

The growth of alternative lending options in recent times meant CMHC was especially interested in its most recent report in monitoring the percentage of borrowers who had chosen those types of loans and had an effective plan to move out of the alternative space.

“Hearing that a lot of borrowers are moving to the alternative lending space because they’re not able to qualify [with conventional lenders], we wanted to look into exit strategies,” Bourassa-Ochoa said.

“We wanted to be able to see for consumers that are in the alternative lending space – are they able to go back to the traditional lending space? In the alternative lending space, we’re talking high interest rates, higher short-term loans. Most of the time, it’s interest-only loans.

“So it’s really a product that is meant to be short-term or temporary. And so we wanted to see: are these borrowers, at the term of their loan, are they able to really go back to the traditional lending space? The successful exit strategy would be to get a loan with a traditional lender or to sell their property.”

It was particularly striking, then, that CMHC’s report showed 70% of borrowers had an effective strategy in place to exit the alternative space in the second and third quarters of this year, down from 72% in the previous two years.

It’s difficult to say whether that’s cause for concern, with CMHC having only recently begun to monitor that trend. Still, “what’s interesting to see is how that’s evolving through time, and we’re just seeing that it is harder to have a successful exit strategy at the moment,” Bourassa-Ochoa said. “So it is something that we’re going to want to look at closely in the coming quarters.”

In terms of overall market risk, it’s important to keep in mind that despite the growth of MICs in recent times, they still have a “very small” share of outstanding mortgages in Canada – between 1% and 2%, according to Bourassa-Ochoa.

The risk profile of alternative lenders is also decreasing due to a number of factors. “We do see in general that [MICs] have a higher share of first mortgages [and] loan-to-value (LTV) ratios remain stable,” Bourassa-Ochoa said.

“All of those indicators – default rates, foreclosures, delinquency rates – they’re dropping as well in that segment. The risk overall remains low – but I think it’s going to be interesting to see how that evolves.”

What are you advising your clients on an exit strategy in the alternative space? Let us know in the comments section below.