Percentage of alternative borrowers able to gravitate back to conventional lending has plummeted since 2018
Having a viable exit strategy in place is one of the most important considerations for borrowers in the alternative lending space – but the percentage of Canadians who are able to successfully switch back to a conventional lender from the alternative sector has plunged in recent years, according to a new study.
Canada Mortgage and Housing Corporation (CMHC) said in its latest residential mortgage industry report that while 68% of borrowers who left the alternative space in 2018 had moved back to more mainstream options, that percentage had slid to 46% by last year.
Unsurprisingly, that means the number of Canadians who are having to sell their property to exit the alternative space has also spiked, jumping to 54% in 2023 from 32% five years previously.
The most difficult of the past six years to switch back to a conventional lender was 2022, when 75% of alternative borrowers who left the sector did so by selling their property.
Tania Bourassa-Ochoa (pictured top), CMHC’s deputy chief economist, said the trend reflected the clear challenges many Canadians were meeting when it came to securing financing options.
“Something that we’re seeing in the data and that we’re also hearing from people on the ground [is that] it’s very difficult for homeowners, for everyone, to qualify with a conventional lender right now,” she told Canadian Mortgage Professional.
“Interest rates are high, and obviously you have the stress test and a whole bunch of underwriting criteria that borrowers have to respect. So it’s already been harder and harder than we’ve seen in past years… for people that are in the alternative space to exit and to get a B loan, for example, with a conventional lender.”
A recent Ipsos poll indicates that despite the Bank of Canada's recent interest rate cut, most Canadians remain hesitant to enter the housing market due to high borrowing costs.https://t.co/o8cL4ZbTep
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 12, 2024
Trend exacerbates financial woes of many homeowners
Amid rising interest rates and affordability hurdles across Canada’s housing and mortgage markets, the trend of many borrowers having no option but to renew in the alternative space is one CMHC has already highlighted in recent years.
That can create further problems for homeowners, not least because of the reality that most alternative lending is intended only to be a short-term solution.
“It’s not meant to be and it’s not built in a way that’s affordable in the long term,” Bourassa-Ochoa said. “So a lot more people are exiting through sales, and a lot of people are selling their property and taking that avenue rather than continuing with some mortgage conditions that aren’t necessarily made for the long term – or potentially even being delinquent, or defaulting on their loans.”
Alternative lending segment sees activity contract in Q4 2023
CMHC’s report showed the top 25 mortgage investment entities (MIEs) in Canada saw assets under management fall by 2.1% in the fourth quarter of 2023 compared with the same period the previous year, a result that also marked the second quarter in a row that their market share dropped.
While renewals had helped spur an uptick in alternative lending before last year, Bourassa-Ochoa said the latest dip was unsurprising in the current mortgage market and lending environment.
“I think it’s important to understand that alternative lenders are lending more conservatively. The risk profile has increased,” she said. “And so they’re being a lot more conservative in their lending and in terms of investors that are really funding that pool of mortgages, it’s hard to attract and in some cases to keep them because there’s a lot of different options there in terms of investments that are high-yielding, and that are maybe not as focused on the housing market.”
That higher risk in alternative lending arrived as defaults and foreclosures rose in both the single-family and multi-family segments, with the sector’s proportion of first lien mortgages falling.
Still, CMHC highlighted some more encouraging trends in the space – namely, a stable and “relatively low” loan-to-value ratio on new mortgages and an increase in the share price of publicly traded MIEs at the beginning of the year.
Geographical distribution of Canada’s MIEs remains weighted heavily towards Ontario and British Columbia. Fully 46.3% of MIEs are concentrated in Ontario, CMHC said, with British Columbia accounting for 40.4% of the space.
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