Private mortgage lenders raise qualification standards, narrowing options for weaker borrowers


Private mortgage lenders are making it harder to access capital and making it harder for borrowers to get a loan, choking off an important source of funds for those who can’t qualify at a Canadian bank.

Some private mortgage lenders, also known as alternative or subprime lenders, require borrowers to have higher down payments or more equity in their home to qualify for a private mortgage. The higher standards are being rolled out as Canadian banks limit lending in the face of falling house prices and rising interest rates. This sent a flood of new borrowers to private lenders and boosted their business.

MCF Mortgage Investment Corp., which provides loans to Ontario homeowners, had to suspend new loan applications for two weeks in October because it was inundated with new borrowing applicants.

As a mortgage investment company, or MIC, the lender uses capital from investors, along with funds that have been repaid by its borrowers, to provide new mortgages.

“When we need capital, we don’t just go to the floor and arrange another billion dollars. Everything comes directly from private clients,” said Rob Pirie, managing director of MCF Mortgage. “Sometimes we run out of capital, it only takes a few weeks or a month to kind of build up that new capital. It’s not worrying at all. October’s two-week suspension was only his second suspension in nearly five decades of operation.

MCF Mortgage said it has a healthy investor base. But like other PRIs, part of its capital comes when its borrowers repay their loans. MIC mortgages are more expensive than chartered bank mortgages and borrowers generally use them as a stopgap measure to improve their creditworthiness and finances in order to eventually qualify for a cheaper mortgage with a bank.

But many borrowers couldn’t make the leap to the big Canadian banks. This is because banks are federally regulated and must enforce stress test rules that ensure borrowers can make their monthly mortgage payment at an interest rate at least two percentage points higher than their actual contract.

Now that the average mortgage rate is above 5%, borrowers must prove they can make their mortgage payments at an interest rate of around 7%. This has made it harder for borrowers to qualify for a bank loan. Therefore, some borrowers may have no choice but to stay with their current lender even if the mortgage is more expensive.

At MCF Mortgage, borrowers exited after fully repaying their loan in about two years. Now, borrowers are staying longer with MCF, Pirie said.

It wasn’t just MCF Mortgage that had to limit applicants. Over the summer, Magenta Capital Corp. suspended new loan applications. Magenta, which lends across southern Ontario, started accepting new loan applications again in September but has tightened its standards.

Magenta and other private lenders are also protecting their business against a cooling housing market, where the country’s typical house price has fallen 9% since the central bank launched its campaign to curb inflation.

Many subprime private lenders now require borrowers to have more equity in their home in order to qualify for a mortgage. Subprime lenders used to lend up to 90% of the home’s value. Today, many private lenders are only willing to lend up to 75% of the property’s value, also known as the loan-to-value ratio or LTV ratio. This means that lenders have a bigger cushion in case the loan defaults.

At Atrium MIC, which offers mortgages in southern Ontario, loans with a maximum LTV of 75% and above are not currently available, according to its website. The website also said that one of the mortgages still available required an LTV of 65% or less. Atrium did not respond to requests for comment.

Magenta said it lowered its LTV ratio on second mortgages. “We have adjusted our underwriting criteria to take into account the increase in interest rates,” Magenta chief operating officer Albert Oppenheimer said in an emailed statement.

Alta West Capital, which offers alternative mortgages in British Columbia, Alberta and Ontario, has reduced its maximum LTV ratio from 85% to 75%. Additionally, the lender is more selective about who it lends to and does more work on appraising its homes, Alta West President Charles McKitrick said.

Canadian Mortgages Inc. (CMI) also reduced its maximum LTV ratio from 80% to 75%. CMI executive vice president Elizabeth Wood said the lender makes sure its loans reflect market conditions.

Home values ​​have lost at least 20% of their value in the areas that have appreciated the most, notably the suburbs of Toronto and the small towns of southern Ontario.

Each increase in interest rates makes it increasingly difficult for borrowers to qualify with the big banks, thereby shifting tranches of borrowers into the alternative lending space, Magenta’s Oppenheimer said.

Despite the stricter standards, the PRI have seen an increase in demand from borrowers. The amount of assets under management in MICs rose 22% to $14 billion in the second quarter of this year compared to the same period in 2021, according to investment research firm Fundamental Research Corp. During the same period, the value of all outstanding mortgages in the country increased by 10% to $2 trillion.

The previous year, MIC’s assets under management rose 2% to $11 billion, while all outstanding mortgages rose 9% to $1.8 trillion, according to Fundamental research. .

“This year, things have changed. Many borrowers are coming to PRIs,” said Siddharth Rajeev, who heads Fundamental’s research department, adding that mortgage stress has pushed more borrowers out of the prime lending space into subprime.


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