It's more important than ever to stay apprised of developments, says broker
Rock-bottom interest rates spurred a Canadian homebuying surge during the first two years of the pandemic, with the country’s housing market booming as buyers rushed to avail of low borrowing costs.
Private lending solutions also rose in popularity during that time among buyers who found themselves in need of a short-term fix or unable to qualify through an institutional lender, with private rates – traditionally steeper than those of mainstream financial institutions – also falling precipitously.
In recent months, cold water has been poured on that previously scorching housing market as rates rose across the board and yearly home sales plummeted throughout Canada. Buyers are now faced with higher borrowing costs and a stricter qualification benchmark in many cases, and while home prices have inched downwards in many markets, they still remain prohibitively high for many Canadians.
For those would-be buyers still in the purchase mindset, private mortgage solutions could offer a viable option where a loan from an institutional lender isn’t a possibility – but it’s incumbent on mortgage brokers to ensure they understand current real estate market and mortgage lending trends in order to advise clients appropriately in the current climate, according to a prominent broker.
Daniel Vyner (pictured top), principal broker at DV Capital, told Canadian Mortgage Professional that the current volatility could have significant implications for Canadian borrowers seeking a mortgage, especially when it comes to private mortgages and developments in that space.
Home price growth continued at an eyewatering pace during the pandemic as bidding wars, feverish demand and record-breaking supply pushed prices upward at a rapid rate.
That’s no longer the case – and an unpredictable future lies ahead for property prices and valuations across Canada amid the current cooldown and rising rate environment.
“[Brokers] must consider taking a realistic and conservative deep dive on the realities of the contemplated loan not only at funding, but at the time of maturity,” Vyner said, “[especially] during a transitioning market where a loan to value at maturity may be different from the loan to value at funding.”
The cost of borrowing in institutional mortgages continues to rise with little imminent prospect of more lenient rules being introduced on the stress test, he added – meaning it may be possible that a private mortgage, usually accompanied by an exit strategy into a conventional solution, will require an extension or renewal.
In that case, it’s essential to assess, and discuss extension or renewal viability with clients – and have as strong an understanding of the entrance cost of a private mortgage as the exit or extension cost, according to Vyner.
“There are many consideration factors to a private mortgage other than just the interest rate and lender fee. One must consider the importance of understanding the lenders’ cost and policies surrounding administration, prepayment, and extension or renewal,” he said.
“This includes whether the lender may or may not consider providing an extension or renewal and if so, whether the interest rate will change at that time.”
It’s understandable that a lender may not be able to predict whether they will support an extension or renewal at maturity, Vyner said. Still, brokers should consider having a candid and hypothetical discussion with them to gauge if the lender foresees their ability or willingness to provide an extension or renewal, and what the anticipated terms and conditions might consist of.
“Frankly, it’s important to have uncomfortable discussions upfront with your clients and lenders about realities, possibilities and material risks,” he advised. “Transparency always prevails.”
Statistics Canada said the volume of non-bank residential mortgages throughout the country stood at just under $340 billion in 2021’s first quarter. Credit unions and private lenders accounted for about 3.7% of Canada’s mortgage origination activity in 2021 and around 6.7% this year so far, according to RATESDOTCA.
In recent months, regulators have placed a greater focus on lenders and brokers in the private space, with new educational requirements for private lenders on the way in Ontario and the establishment of a separate regulatory body recommended in British Columbia.
Interest rates are expected to continue their upward trend in the coming months, with the Bank of Canada’s next statement on its benchmark rate scheduled to take place in mid-July.
Meanwhile, economists at Desjardins have recently warned that a prolonged cooldown in Canada’s housing market could see home prices fall by 15% by the end of next year.