As interest rates rise sharply, it’s not just variable mortgage applicants who are feeling the pain. Alternative lenders, who serve all corners of the lending ecosystem -- from consumer borrowers who don’t qualify for “A” loans, to private equity for investors and even construction financing -- are having to make changes to their operations and product offerings, as their access to cash is now at a premium.
That’s because a good chunk of alternative mortgages are funded either through deposits, or variable debt; as a result, they’re directly impacted by price changes made by the Bank of Canada, which delivered a surprise 1% increase rate hike last week. That’s causing lenders to tighten their belts in a number of ways.
“MICs [Mortgage Investment Companies] are short term lenders, offering generally six month to two year terms,” says Hali Noble, Founding Director and SVP of Broker Relations at Fisgard Capital.
“With qualification at higher convention interest becoming more difficult, there has been a decline in payouts and an increase in renewal requests. This results in less funds available to deploy in new mortgages putting pressure on MICs to raise capital and for their underwriting teams to process more applications.”
This is playing out through smaller loan-to-value ratios offered to borrowers, especially for those buying, or trying to build, in markets with softening property values.
“Everybody is scaling back slightly differently,” says Jerome Trail, Mortgage Broker at The Mortgage Trail, who says the lending criteria for those within the GTA can vary dramatically from those in peripheral markets. “They’re just aware that all the price points are dropping a lot higher, and more in those areas than in Toronto; we’re really seeing nothing or very little change, for instance, in Toronto. It’s full loan to value.”
“[Lenders] are overriding anything niche, and that would include any rural areas or anything non-metropolitan. Each lender has their own delineation -- 30 km, 50 km, 80 km -- from a major metropolitan centre with at least 100,000 people: [for those borrowers] the maximum loan-to-value has gone from 75% to 65%.”
Some lenders are reducing or freezing certain product types altogether; Fisgard said last month it is suspending its construction financing program in Ontario, BC, Manitoba, and Alberta. Magenta Capital Corporation, another private mortgage lender, also made headlines when it announced it was freezing all loan applications until after September 1.
This comes at a time when demand for alternative lending is through the roof; as the stress test becomes an ever-tougher hurdle for those applying for conventional lending products, borrowers have turned to the alt space. Noble says that demand for non-bank financing has “significantly increased” within the last six months.
“Business was brisk before February when most markets seemed to hit the top but there is definitely a feeling of urgency from mortgage professionals and their clients to have their financing approved and funded as soon as possible,” Noble tells STOREYS.
The reality for the alternative lending space -- and all borrowers -- is the need to acclimate to a normalized cost of borrowing, now that the record-low interest rates party has ended.
Dean Koeller, Chairman of the Board at the Canadian Alternative Mortgage Association, says there will be a period of adjustment as the business becomes intrinsically riskier.
“Over the last five years, the alternative lending industry has experienced some of the lowest losses in its history,” he says. “With rising interest rates and real estate markets with less demand we can expect to see a normalization in losses which will over time place upward pressure on interest rates that alternative lenders will offer.”
He adds that today’s environment poses new challenges to investors relying on the alternative lending space, and that those with the foresight to keep their offerings fluid are most likely to see success, even as costs to lend soar.
“Investors who are looking for places to invest their capital will have some difficult decisions to make. Marketable securities have been very volatile over this fiscal year and bond rates are not offering the stability and real returns based on inflation,” he says. “Investors will have to make decisions as to risk vs. return.”
“The alternative lending industry has performed very well over the last decade and while past returns are no guarantee of future returns there are some lenders who will perform very well over the next several years through their flexible lending options they are able to provide.”