New report: Private mortgages soared 72% to $22.4 billion in 2022, posing a risk to housing market
Ontario private mortgages soared 72 per cent to $22.4 billion in 2021 from $13 billion in 2019, according to the report from the Financial Services Regulatory Authority of Ontario (FSRA).
The report shows more Canadians are taking out private mortgages and holding on to them longer, posing a risk to the real estate market. Some mortgage brokers warn the trend could have serious repercussions, including a possible wave of defaults as overextended borrowers grapple with rising rates and expenses.
“That’s an enormous number,” said Ron Butler, mortgage broker of Butler Mortgages. “It’s impacting some homes default.”
Around 20 per cent of mortgages in Ontario are now through private lenders, said Ron Alphonso, president of Mortgage Broker Store. Of that group, he forecasts the default rate will be approximately 5 to 10 per cent. A default is when a homeowner can no longer make their monthly mortgage payments.
The number of clients who are unable to renew their mortgage will be three to five per cent, he added.
“If you can’t renew you need to either sell your home or you’ll go into a power of sale,” he said — instances where homeowners are forced to sell because they can no longer service their mortgage.
The most recent available data shows that in 2021, 10.6 per cent of new mortgages were private, which has likely increased in 2022 after the Bank of Canada raised the overnight lending rate, making it more difficult for prospective homeowners to borrow from the banks.
Around two per cent of mortgages default in the GTA, but the increase in private mortgages is pushing the number in the range of 3.5 per cent to four per cent, Butler estimates.
Typically, prospective homebuyers have turned to private mortgage lenders when they’re unable to qualify at a Canadian bank. It can be a more attractive option as private lenders don’t require a stress test, unlike federally-regulated banks.
In a stress test, buyers must prove they’re able to afford a mortgage rate two per cent higher than the current rate. Combined with higher home prices, inflation, and the Bank of Canada rate hikes, qualifying at a bank is becoming increasingly difficult for some, experts say.
For a private lender, the central determining factor to give out the loan is the borrower’s equity, or total assets — whereas banks evaluate equity, income, and credit.
“People don’t go looking for private mortgages, but when they don’t qualify with a bank they seek alternative methods,” said Huston Loke, executive vice president, market conduct, at FSRA.
It’s easier to take out a mortgage with a private lender but it comes with elevated interest rates, meaning the mortgagee is highly leveraged and therefore, vulnerable.
In the GTA, around 50 per cent of power of sale listings comes from the private lending space, Butler said.
The loan usually lasts one year before the homeowner needs to renew or decides to move to a bank. The Financial Services Regulatory Authority of Ontario recommends the loan should not go on for longer than two years, due to high interest rates.
“A private mortgage should really only be seen as a temporary option for one or two years until someone’s finances improve,” said Loke. “The borrower needs to be aware if they don’t have options to exit the mortgage they could be accumulating interest at a rate much higher rate than they would with a traditional mortgage.”
But the private lending space isn’t the only sector at risk. Defaults are also expected to increase with traditional mortgage lenders, Alphonso said.
In November 2022, 0.07 per cent of 2.2 million mortgage holders missed their mortgage payments, according to the Canadian Bankers Association.
If the default number rises to 0.3 per cent, which is a moderate scenario, then 6,601 mortgagees could default in any given month. If defaults rise to 0.6 per cent (which hasn’t happened since the mid-1990s) in a worst-case scenario, then 13,203 mortgagees default in any given month, which could harm the overall real estate market, Alphonso said.
Defaults are still low overall, but often the reporting lags by a few months and in four to eight months, the picture will become clearer, experts say.
“This will be a really rough year because as more people are unable to pay back their loans, we’ll see more defaults and power of sales hit the market,” Butler said. “We are seeing it right now; private lending is at the forefront of power of sales.”
Toronto mortgage broker Vince Gaetano said had three clients that have been served with notice of power of sale from private and alternative lenders in January.
“I’ve been doing this for 30 years. I haven’t seen this many in recent history,” he said.“I don’t think it’s a coincidence, I think it’s a sign of the times,” he said.
Peppered with colourful all-caps like “HELP!!! MISSISSAUGA POWER OF SALE *MUST SELL IN 30 DAYS!!!” and “POWER OF SALE BACK ON MARKET — DEAL FELL THROUGH!!!” power of sale ads are hard to miss on sites like Kijiji and HouseSigma. One three-bedroom, four-bathroom Brampton townhouse was sold as a power of sale for $919,000 in December 2022, after it was bought in 2021 for $1,260,000.
“The bottom line number is that we’re not seeing mortgage delinquencies increase,” said Seamus Benwell, a specialist in housing research for the Canada Mortgage and Housing Corporation. But, like Butler, he notes that mortgage delinquencies are lagging indicators that tend to show up later. This is because of the 90-day time frame but also because Canadians tend to sacrifice whatever else they can before their homes, such as payments on credit cards and car loans.
“We’ve started to see some increases in delinquencies in those products, especially credit cards, over the last five or six months,” he said.“That could be a sign of future difficulties, that Canadians are sort of struggling to keep up with all their payments.”
Rebecca Oakes, vice-president of Data & Analytics at Equifax Canada, which also measures mortgage delinquencies, said their numbers also show very low rates. But they are also seeing a slight uptick in credit card and auto loan delinquencies.
With rising interest rates and inflation, and some people with variable rates hitting their trigger rate, “it still might take them a few months until that starts to really come through in a delinquency rate,” Oakes said. About half of variable-rate mortgage holders with fixed monthly payments have already hit their trigger rate, meaning they are no longer paying off the principal on their home, just the interest, according to a November Bank of Canada report.
Shubha Dasgupta, CEO & Co-Founder, of Pineapple, a digital mortgage company, said he doesn’t see an alarming increase in power of sales at this time. But he is seeing “more than the norm.” This is “more on the private side” and a lot of it is “more so against property value declines.”
For example, if a lender lent $800,000 on a $1-million home that is now worth $900,000 they may not want to renew that mortgage. “But that borrower doesn’t have another option, so what that private lender does is move it into default and power of sale,” he said.
This article was reported by the Star.