Recent performance has been driven mainly by borrowers renewing in the space
Alternative lenders in Canada have seen their market share increase in 2023 and experienced the “least significant slowdown” among mortgage lenders in a cooling environment – with that trend seemingly driven by existing borrowers renewing rather than an influx of new entrants.
The assets under management of the top 25 mortgage investment corporations (MICs) in Canada rose by 7.1% in the first quarter of the year compared with Q1 2022, Canada Mortgage and Housing Corporation (CMHC) revealed in its latest residential mortgage industry report, outpacing overall national mortgage debt growth.
Still, that marks the first time after five consecutive quarters that double-digit year-over-year growth hasn’t been recorded, the housing agency said, representing a “notable slowdown” amidst a wider market downturn.
Tania Bourassa-Ochoa (pictured top), CMHC’s senior specialist, housing research, told Canadian Mortgage Professional that the growth had largely been spurred by an uptick in borrowers having to renew with alternative lenders rather than graduating away from the sector.
“One of the interesting things with the alternative lending space right now is that when you’re looking at market share, we’re seeing that it looks like their market share has been increasing – but really what’s happening is that across the industry, mortgage activity has slowed down quite significantly,” she said.
“But what we’re really seeing in the alternative lending space is not so much new borrowers. It’s the same borrowers that are renewing so it seems like there’s maybe more activity, but it’s just mortgages that are being renewed and renewed because these lenders are not able to get qualified in the traditional space.”
Borrowers are grappling with substantial affordability issues, leading many to seek solutions in the private lending sector to fulfill their financial requirements.
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 4, 2023
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How risky is Canada’s alternative lending segment?
While the alternative lending segment was at a relatively low risk in the first quarter of this year compared to before the COVID-19 pandemic, some risk indicators are inching upwards, CMHC said, compared to the traditional lending space whose risk profile remains stable.
At 24.1%, the debt-to-capital ratio remains high, the report indicated, and capital availability in the space could be impacted in the months ahead by the possibility of investors turning towards options with less exposure towards the Canadian housing market.
Meanwhile, delinquencies of 60 more days in the alternative sector have increased in each of the last four quarters. “One of the things that we’re seeing when looking at delinquency rates by lender types is delinquencies increasing within the alternative lender space,” Bourassa-Ochoa said. “That’s really one of the things that’s pushing that risk profile upward.”
The percentage of 60-plus-day delinquencies among mortgage investment entities was 1.34% in Q2 2022, CMHC said, rising to 1.50% in the third quarter of that year, 1.65% in Q4, and 1.95% by 2023’s third quarter.
Borrowers veering away from shorter-term fixed-rate mortgages
As borrowers began to gravitate away from variable-rate mortgages amidst a flurry of Bank of Canada rate increases, one- to two-year fixed-term options surged in popularity across the market earlier this year.
Those product types allowed borrowers to avoid their interest rates or mortgage payments spiking on a monthly basis and keep their options open with rates expected to have fallen by the end of that 12- or 24-month period.
However, continuing uncertainty in the economic outlook meant Canadians largely began to pivot away from those shorter terms as the year progressed, CMHC said, suggesting that hopes of an imminent rate cut began to fade.
“Earlier this year, they were choosing one-year, two-year terms. And that was really suggesting that there was an anticipation that interest rates would go down, down the road,” Bourassa-Ochoa said.
“One of the key messages [from the Bank of Canada] is that we might be envisioning a higher-for-longer interest rate environment, and so we’ve also been seeing this in their choices that they’re making in terms of the interest rate – so they’re favouring more three to four years now.”
Still, the fact that the share of mortgages with terms of five years or more continues to be low is a significant one, she added, indicating that many borrowers are still deciding not to lock in for traditional terms.
“We’re still not seeing that [borrowers] are choosing five-year fixed, and that used to be something that we would see, historically speaking,” Bourassa-Ochoa said. “So that is definitely an interesting indicator to look at in terms of the perception or anticipation of interest rates.”
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