Lending executive on the rise of the alt space – and what mortgage brokers need to know about the sector
A turbulent few years for the Canadian housing market and wider economy have presented their fair share of challenges for homebuyers and owners – and a top lending executive says they’ve also accelerated the rise of alternative lending as a force in the mortgage sector.
Major banks have tightened their lending criteria in recent years amid that volatility, while interest rates have whipsawed from one year to the next as inflation, the COVID-19 pandemic, geopolitical turmoil and other factors all wreaked havoc on the rate outlook.
And Pierre Martin (pictured top), vice president of residential lending at Home Trust, sees those factors as key drivers of the growing prominence of alternative and private lending solutions.
“I do think over the years we’ve definitely seen a clear shift towards this notion of near-prime alternative borrowing, and even private borrowing,” he told Canadian Mortgage Professional. “We’ve seen a lot of private and MICs [mortgage investment corporations] growing year over year because I think there was definitely a need.
“When you look at it, it’s not necessarily driven just by individual behaviour and consumption – it’s really broader economic conditions since 2019. It seems that we haven’t seen a year that’s [been] the same, year over year. And it’s difficult because for a borrower, you need that consistency.”
Unsurprisingly, refinances have outweighed purchases since last year, Martin said, as potential buyers hit pause on their plans while they wait to see what happens to the economy and interest rates.
Many also need a more flexible solution than some of the country’s biggest institutional lenders are able to offer because costs are higher at renewal time after a big run-up in rates since their mortgage began.
Martin said that’s also caused borrowers to turn in increasing numbers to other product types they might not have previously considered.
“The reality is the cost has increased and spending power has weakened, and that created more complex scenarios overall,” he said. “Combine that with property values that have softened in some markets – [even] while there’s still an increase in some.
“So values are going down. What does that do? That reduces available equity and adds another layer of complexity. We’re definitely seeing more borrowers exploring equity access solutions.”
Term preferences transforming in a turbulent market
Another growing trend in the alternative sector because of those growing borrower challenges: term preferences are evolving and stretching out.
In the past, alternative lenders were mostly associated with one-year terms because that was normally enough time for borrowers to sort out any debt or payment issues and then graduate back towards the conventional, prime lending space and a lower rate.
But Martin said alternative lenders are now seeing a much higher number of two- and three-year lending terms, also in part because borrowers believe current economic instability could last for longer than a 12-month spell.
What mortgage brokers need to know
With alternative lenders now occupying a bigger part of the market, brokers have seen their business with those institutions surge in recent years – and Martin said communication is key for brokers to get deals over the line in the alt-space.
“One of the things I always say is, ‘Be honest.’ That’s the number one thing,” he said. “We’re an alternative lender and the story does matter for us. Tell us what we don’t see.
“There’s a reason that you’re coming to an alternative lender. Explain that to me: [If] the FICO score is low, tell me why it’s that low. For us, it’s really: Don’t assume that a lender will piece it together. Tell us what we don’t see.”
Top of mind for brokers should be not to assume that lenders will automatically know everything they should need to about a file. The story, according to Martin, is essential. “When everything is clear and easy, the process is way, way easier,” he said.
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