Regulators continue to set sights on private mortgage space

A new poll shines a light on the need for greater consumer awareness, according to Ontario authority

Regulators continue to set sights on private mortgage space

The growing prominence of private solutions has been a big topic across Canada’s mortgage market in recent times – and regulators appear to be placing a stronger focus on education and awareness among consumers on what a private mortgage can entail.

The Financial Services Regulatory Authority of Ontario (FSRA) said it was urging homeowners to do their research before delving into the private space, having recently published the results of a new poll that found over half (54%) of Canadian homeowners are unaware that many private mortgage payments only service interest, rather than interest and principal.

The regulator said it believed the share of private mortgages funded in Ontario had surged during the past two years, indicating that it had almost certainly ticked upwards in consecutive years from 10.6% in 2021.

In 2019, Ontario brokers helped arrange private mortgages to the tune of $13 billion – a figure that had spiked to $22.4 million two years later amid a housing market boom and steeper qualifying criteria to secure a mortgage.

Speaking upon the launch of FSRA’s consumer education campaign surrounding private mortgages, the regulator’s executive vice president of market conduct, Huston Loke, said the survey results underscored the importance of knowing exactly what’s in store before signing up to a private solution.

Sixty-six percent (66%) of respondents said they wouldn’t like to pay more in broker commissions or lender fees to get a private mortgage, while 80% said it was essential to put a clear exit strategy in space to move from a private to a conventional solution.

“With rising interest rates, high inflation, and a slowing economy, more consumers are struggling to qualify for a traditional loan,” Loke said. “It’s critical that homeowners who enter into private mortgages fully appreciate how their loan works, the pros and cons of the arrangement, and the true cost of a private mortgage.”

He highlighted possible higher lender fees, interest-only conditions and shorter terms as common features of private mortgages, emphasizing that for most people, they should be viewed as “a short-term stop gap, not a long-term solution.”

Growing national attention to private mortgages

That focus is being replicated at a national level, according to Antoinette Leung (pictured top), new chair of the Mortgage Broker Regulators’ Council of Canada (MBRCC).

Leung, who also serves as FSRA’s head of financial institutions and mortgage brokerage conduct, told Canadian Mortgage Professional that MBRCC had identified an interest in private mortgages and gaining a stronger understanding of the space in its last strategic plan.

“This is a topic that is of interest to everyone,” she said. “What we have said we’re going to do is… review the practice and the regulation of private mortgages and private lending. Our plan is to complete this review in the near future.

“The reason why we want to complete this goal is to identify: Are there any consumer protection gaps based on the practices that we’ve seen and the regulations that are currently in place? And if there are gaps, then these would be identifying: What are some of the things that regulators can do to address the consumer protection gap?”

New changes afoot in the Ontario market

In Ontario, new educational requirements have been introduced for agents and brokers transacting in the private space in the form of a new licensing class for mortgage professionals.

Effective from April 1 this year, the measure will see agents divided into two categories: Level 1-classified agents, who are permitted to arrange mortgages solely with “financial institution type lenders,” and Level 2 agents, who can arrange mortgages for lenders including private individuals.

Speaking with CMP last year, Loke said the move had been made to reflect the growing popularity of private mortgages and the need for agents to ensure they’re putting borrowers in a solution that closely fits their own situation.

“I think the environment’s changing,” he said. “Private mortgages are not always problematic, but they’ve got to be right for the borrower – and so we’re changing the regulations to match the need.”

Would you like to see more scrutiny of the private mortgage space and further educational requirements for agents and brokers transacting in the sector? Let us know in the comments section below.