Why private lending’s growth could continue after the pandemic

It was already becoming an increasingly common option among Canadian borrowers long before anyone had even heard of COVID-19 – but during the pandemic, the rise and rise of private lending has been one of the mortgage industry’s most noteworthy trends.

Tightening requirements on the part of institutional lenders and the unexpected personal circumstances foisted on many Canadians at the onset of the pandemic saw a growing number of borrowers turn to private solutions – and according to one prominent industry executive, the growth of the space is unlikely to slow anytime soon.

Christine Xu (pictured), president and owner of the MoneyBroker Canada brokerage, told Canadian Mortgage Professional that the surge towards alternative and private solutions had been spurred by those lenders’ less rigid approach on income qualification and credit, a factor that would continue to play a part in Canadians’ borrowing decisions.

“I don’t see institutional lenders truly relaxing too many of their lending guidelines; [at] a Schedule A lender, [borrowers] always need to be income qualified,” she said.

“For the private side, most lenders are more flexible in terms of income and credit, only emphasizing the property itself. It’s much easier to get approval, and lots of people take the private lender as an interim solution. I think the market will still grow at a pretty rapid pace.”

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In addition to operating as a mortgage brokerage, MoneyBroker runs its own mutual trust fund specializing in private mortgages, Ready Capital Mortgage Investment Trust, with a total fund size of around $40 million.

The ability of borrowers opting for a private solution to secure funding in a short space of time, coupled with record-low interest rates in the private space, means it’s often a popular option for those who can’t afford the sometimes-lengthy wait for approval from institutional lenders.

Xu said that it was common for clients who had attempted to secure funding through Schedule A lenders – or who had worked with an inexperienced broker who wasn’t sure how to package a deal – to stress the value of quick turnaround times when dealing in the private sphere.

A growing number of Canadians are now self-employed, with the advent of COVID-19 having accelerated a trend that had already been evident in recent years.

Xu said that was also likely to drive more borrowers to the private and alternative lending spaces, with many of those entrepreneurs not meeting the income qualification requirements laid out by institutional lenders.

“We have an increasing self-employed population every year; most self-employed people are not going to be income qualified,” she said. “So not only private lenders, but what we call Schedule B lenders, have a huge increase in their portfolio because their interest rate is also at historical lows.”

While many Schedule A banks have policies in place designed to provide solutions for new immigrants to Canada, Xu said that with institutional lending requirements also tightening for would-be borrowers in that demographic, private lending represented an increasingly viable avenue for new Canadians.

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“Lots of Schedule A lenders do have new immigrant policies – but before, if you put 35% down you don’t need [to show] income, credit, anything.

“Now every Schedule A lender has attached a requirement: not only do you have to show a down payment, you have to show you have the ability and cash flow to support it. There’s been a little tightening up in terms of the Schedule A lending, and because of that, private lending will benefit from it.”

The growing vitality of the private lending sphere means that it clearly presents plenty of opportunity for brokers thinking of getting involved in the space. Still, Xu cautioned that it was necessary for mortgage professionals to do their homework on options in their space and avoid pairing their client with an unscrupulous lender.

“Private lenders are not all the same; be aware that some lenders are more credible than others,” she said. “[Some] might have a very low starting rate – sometimes only three months – then after that they force the client with a huge renewal fee and rate increase.”

Nonetheless, Xu said that with interest rates in private lending currently at historically favourable levels, the opportunities for brokers and their clients in dealing with a reputable lender in the space are clear.

“The interest rate is as low as 3.99%,” she said. “It’s very low for the borrower, and I think people should take advantage of it.”