Could Canada’s mortgage stress test rules be coming for private lenders?
That was a rumour that appeared in a Reuters article in January of 2019. According to the article, three sources with direct knowledge of the matter, who declined to be named, said that Canada is considering subjecting private lenders to the same mortgage stress test rules faced by banks to prevent housing markets from being destabilized by the lenders’ rapid growth.
The speculation was quickly shut down by Finance Minister Bill Morneau.
“I’m not currently considering any stress tests on private mortgage lenders,” Morneau told reporters in Ottawa, as reported on January 28, 2019.
“We’re always looking at the entire mortgage space to make sure we have a system that is providing the adequate protections for Canadians,” Morneau said.
“That means we need to think about obviously the space that we are directly regulating and what our regulations do in terms of impacts on other parts of the provision of that sort of credit. But I don’t have anything specific in that regard right now.”
Even if the rumours were false, it’s undeniable that private mortgage lending has risen since Canada introduced new mortgage stress test rules on January 1, 2018. Under the B-20 guidelines, federally regulated mortgage lenders must stress test all mortgages – even uninsured ones with a 20% down payment or greater.
The stress test rules have caused controversy and some organizations – including Mortgage Professionals Canada and the Canadian Home Builders Association – are calling for reform.
In a report on the matter, MPC Chief Economist Will Dunning stated that though the mortgage stress test rules are meant to remove risk from the housing market, they could be having the opposite effect by driving a greater share of buyers to alternative lenders that are not federally regulated.
The 2018 Q4 Teranet Market Insights Report also found an increase in the volume of private mortgages.
According to the Teranet MIR, 20% of refinancing mortgage transactions (defined as mortgages registered on a property that did not involve a sale) during the second quarter of 2018 were sourced from private lenders – a 67% increase over two years ago.
In addition, the growth in refinancing mortgage transactions financed from private lenders was highest in municipalities that saw a high percentage of investors buying houses in 2017.
York Region had the highest level of refinanced private mortgages in the GTA, with 21% of their refinancing mortgages in 2018 sourced from private lenders.
Turning to mortgages for properties with a sale, private lenders accounted for 6.8% of mortgage transactions in Q2 2018, up from 4.9% two years ago. Detached homes without a sale were behind 49% of all private mortgage funds from 2016 to Q2-2018.
The question remains – should private mortgage lenders in Canada be required to comply with mortgage stress tests? There are pros and cons on both sides of the argument.
But, according to Finance Minister Bill Morneau at least, that isn’t happening anytime soon.
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