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17 July 2019

Alternative lending becomes more popular

In 2018, Canada saw a growing number of borrowers addressing alternative lenders. Meanwhile, new mortgage growth was the slowest in more than a quarter of a century, pushed down by government interventions aimed at cooling the real estate market.

The recent report by CMHC says alternative lenders, which work with riskier clients, took 1% of Canadian mortgages last year.

There were 200-300 active alternative lenders in Canada in 2018, accounting for $13-$14 billion of outstanding Canadian mortgages. It was $11-$12 billion a year earlier, and about $8-$10 billion in 2016.

According to CMHC, their share at the market is rising, noted Tania Bourassa-Ochoa.

Those who choose alternative lenders tend to have riskier profiles. Such clients may include self-employed borrowers, investors with more than one property, and borrowers who need short-term financing because of poor credit history, health problems, divorce or other problems.

The delinquency rates on such mortgages are usually higher than in case of traditional lenders. In the third quarter of 2018, the delinquency rate for alternative lenders reached 1.93%, while mortgage finance companies, credit unions and banks reported 0.25% or even lower results.

In April, CIBC's deputy chief economist pointed to the increase of alternative lenders in Ontario. Last year, they accounted for almost 12% of all transactions in the province and about 15% in case of the GTA, the report says. It’s almost a 2% gain since the new mortgage stress test took effect.

Alternative lenders account for about 7% of the market if we base the calculations on dollars, as the average loan size is about twice smaller than in case of banks.

According to Benjamin Tal, alternative lending is part of a normally functioning mortgage market. However, a quickly growing sector already isn’t.

At the same time, Bourassa-Ochoa believes a 1% share at the market is relatively small.

It’s the first CMHC’s report of this type, and the Corp. plans to continue the researches annually with quarterly updating.

 

 

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