Private mortgages have become increasingly prevalent in Canada as higher interest rates and tighter financing requirements push more homebuyers out of the traditional lending system, a trend experts say will continue this year.
In 2019, the dollar value of private mortgages issued by licensed mortgage brokers in Ontario alone was $13 billion, or 9.3 per cent of the overall market, according to data from the Financial Services Regulatory Authority of Ontario (FSRA).
By 2021 (the latest data available), private mortgages grew to $22.4 billion, or 12.3 per cent of the overall market in the province, the data shows.
Private lenders are now restraining themselves because of the risks they see on the horizonFrances Hinojosa, CEO, Tribe Financial
Data on the private lending market is difficult to come by because they are not fully tracked by government regulators. FSRA’s data only encompasses licensed mortgage brokers, and not lawyers or construction companies, which can also facilitate private lending.
Frances Hinojosa, chief executive officer and principal broker at Tribe Financial, says while she expects demand for private mortgages to continue growing this year, private lenders are becoming more strict with who they finance.
“This year moving forward, you might see it slowing down simply because of the fact that private lenders are now restraining themselves because of the risks they see on the horizon. So they’re reducing the loan to the values that are available,” she told Yahoo Finance Canada in a phone interview.
Demand is still strong, he says, but suitability and affordability constraints for many homebuyers will be barriers.
The increase in private lending has coincided with the surge in home prices over the past several years and the rise in interest rates, which has made traditional financing inaccessible for more buyers.
Hinojosa says he believes the rush to get into the “fast and furious” housing market, poor financial advice and buyers finding themselves in a pinch for financing have all contributed to the growth of private lending.
“Those are the ones who are now getting caught in the crossfire because the exit strategy to just simply renew again is now not becoming an option as private lenders start to pull back,” he said.
Private mortgages can offer quick access to financing with little documentation, there’s no stress test required and approval is typically based on the property value, says Tuli Parubets, a mortgage agent at Toronto Mortgage Financing.
However, interest rates on private mortgages can be in the double-digits, there are lots of fees associated with the loan, and it can usually be recalled at any time by the lender, he adds.
Private mortgages are also meant to be a short-term financing solution. Terms are typically one year.
Lender of ‘last resort’
“I seldom recommend private lending,” Parubets said.
“Private lending should be a last resort. If you start your inquiry with a private lender, you will end up with a private lender. Private lending can be a debt trap, much like payday lenders. It’s very hard to escape them once you are in.”
A mortgage broker should not jump to private lending automatically and she advises consumers to get a second opinion to make sure all other options have been exhausted.
“I put a plan in place that the client has to work towards to graduate them into a better rate environment. Always plan ahead, there should always be an exit strategy,” Parubets said.
Meanwhile, Hinojosa says private mortgages make up a small fraction of her overall business.
She only recommends them on an “as needed, as required and as appropriate” basis and says anyone considering private financing should take a deep dive with the broker or lender on the terms, renewal clauses and costs.
“The more questions the better,” she said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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