Will the growth of alternative lending in Canada continue?

Brokers talk prospects for a surging segment of the national mortgage market

Will the growth of alternative lending in Canada continue?

The growth of alternative and non-bank mortgage lending in Canada in recent years has been well documented: amid major institutions’ tightening criteria and worsening affordability for many borrowers across the country, the popularity of other players has swelled.

Even as the mortgage and housing markets cooled at the beginning of 2023, alternative entities clearly experienced “the least significant slowdown” among lenders and saw their market share continue to grow, according to Canada Mortgage and Housing Corporation’s (CMHC’s) residential mortgage industry report last fall.

Assets under management at the top 25 mortgage investment corporations (MICs) grew by 7.1% on a yearly basis in the first quarter of 2023, CMHC said – following a Q3 2022 surge of more than 24%.

Unsurprisingly, that growth has also seen a big upswing in alternative business among the mortgage broker community in recent years.

Speaking with Canadian Mortgage Professional at last week’s Canadian Alternative Mortgage Lenders Association (CAMLA) event in Brampton, Mortgage Outlet chief operations officer and broker Leah Zlatkin (pictured, top left) said building a strong understanding of the space, and lenders’ varying appetites for different deal types, was of paramount importance for brokers.

“There are so many lenders in the MIC space, in the private space – it’s always a good idea to understand what people’s wishes are,” she said. “And each lender has a very specific set of lending guidelines, where they’ll work, who they’ll work with.

“As a good broker and somebody who deals in privates or who deals more in the alternative space, it’s really important to understand exactly what you can do, where to save time for yourself and your clients when you get an opportunity to.”

Affordability challenges, regulatory focus likely to spur further growth

Shawn Stillman (pictured, top right), co-founder and principal broker at Mortgage Outlet, told CMP around 25% of the company’s business was now in the alternative and private space – up from “probably less than 5%” around three years ago.

That’s a reflection, he said, both of rising affordability challenges and action by the federal government to rein in conventional lenders and tighten oversight of the banking space.

“A lot of it really comes down to two main factors: number one, people are biting off more than they can chew and kicking the can down the road,” he said, “and they’re kind of going from A lenders to alternative lenders, to private lenders, and in some cases layering on two and three mortgages behind the A lenders.

“But that’s the regulatory environment. The government has made it harder for prime lenders to service clients’ need… [It’s] the result of 15 years of government actions making it harder to Canadians to borrow money from banks, which I think in some ways is their goal – to protect the banking system. And this is a result of it.”

Strict oversight of the banks, he added, is a “prudent” move by the government, helping safeguard the stability of Canada’s financial system and overall economy.

Rising interest rates over the past two years have helped squeeze affordability for many borrowers and push qualification with institutional lenders even further out of sight – but the pendulum is unlikely to swing back towards conventional lenders even if rates eventually start to dip, according to Stillman.

That’s partly because of a recently introduced requirement by Canada’s financial services regulator, the Office of the Superintendent of Financial Institutions (OSFI), that banks limit to a certain threshold the percentage of uninsured loans more than 4.5 times borrower income.

Income declaration types continue to shift

Another factor likely to boost the continued growth of alternative lenders is the fact that income types and declarations have evolved so dramatically in recent years, Zlatkin said, particularly since the COVID-19 pandemic.

“I think there’s a big amount of variance in terms of the people out there looking for mortgages to buy homes, with the different types of income that people are now benefiting from,” she said. “Whether you’re a contract worker or whether you do odd jobs, it’s harder and harder to get conventional financing, and a lot of those people have nowhere else to turn but potentially MICs.”

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