Fewer potential borrowers meet the eligibility criteria. The perceived rise in interest rates pushes them towards “alternative” lenders, and they stay there longer.
At the Canadian level, “alternative” lenders were already processing nearly 7% of activity in the first quarter, they who held less than 4% of mortgage loans the previous year. This shift in activity towards unregulated lenders included an increased share of so-called quality borrowers. Data on mortgage investment companies taken by the Canada Mortgage and Housing Corporation (CMHC) showed a decrease in their risk profile. The average share of first mortgages in their portfolio fell from 75.7% in the second quarter of 2020 to 81.4% in the corresponding quarter of 2021. Before the pandemic, their portfolio consisted of 65% first mortgages. first rank, the remaining 35% being of lower rank.
And if “alternative” lenders continue to have the highest delinquent mortgage rate at 0.69% — compared to between 0.10 and 0.14% for others — because of the risk profile of their clientele and distinct characteristics of their loans (short-term mortgages, interest only, etc.), it is also in this segment that the rate of delinquent loans registers the most significant decrease. “In the second quarter of 2022, the increased proportion of first mortgages and stable levels of the average loan-to-value ratio on new mortgages, together with the decline in delinquent loans and foreclosures, reduced the risk associated with the portfolio” of these lenders, called mortgage investment entities.
This perceptible movement at the start of the year has since intensified, although the sharp rise in interest rates has weighed on the granting of new mortgage loans. In the first two quarters of 2022, those granted by federally regulated banks were down 7.9% compared to the same period in 2021. The decline was 5.5% for loans granted to federal banks. purchase of a property and 13.3% for refinancings. Over the same period, non-bank mortgage lenders, including credit unions, mortgage companies and mortgage investment entities, suffered a drop of more than 23%. But the latter have granted a total of 110 billion dollars in mortgage loans, against 191 billion for the banks, we read in the fall edition of the report on the mortgage sector published Wednesday by the CMHC.
It also shows that beyond the impact of the economic climate, demand is also affected by the criteria for granting new mortgage loans. Although the approval rate remains higher than before the pandemic, “declining ratios between approvals and applications show that it is increasingly difficult for potential borrowers to qualify for loans subject to the test resistance and meet the lender’s criteria.
Remember that even for a down payment of at least 20% to avoid mortgage insurance, institutions under federal jurisdiction must subject potential buyers to a test showing that they can pay their mortgage at the eligible rate. the higher between the contractual rate increased by two percentage points and the floor rate of 5.25%. And that the best rates, fixed or variable, currently oscillate between 5 and 5.7% depending on the maturity.
In doing so, “alternative” lenders increased their market share of newly originated mortgages in the first half of 2022. Overall mortgage debt in Canada was up 9.75% in the second quarter of 2022 compared to the quarter corresponding to 2021. In the meantime, the assets under management of the 25 largest non-traditional lenders have increased by more than 22%.
Case by case
This unregulated segment operates on a case-by-case basis, but typically the asking rate is 100 to 200 basis points higher than traditional lenders. And the loan will generally have a shorter term, time to allow the borrower to requalify with traditional lenders. Within this segment, each will have different interest rates and approval requirements, total loan amounts, and unique maximum loan-to-value coverage.
However, in the current environment, the tightening of mortgage rules and the rapid rise in interest rates are making it even more difficult for mortgage borrowers to obtain a loan from traditional lenders. This also means that fewer mortgage borrowers can return to traditional lenders at the end of their loan. CMHC added that in the third quarter of 2022, 33% of mortgages were not repaid on time and remained in the portfolio of non-traditional lenders, compared to 29% a year earlier.
In a context where borrowers stay there for a longer period and therefore pay higher interest rates, affordability remains a problem for them, who often find themselves in precarious financial situations, he concludes.