The time is ripe for private lenders in Canada.
According to Mortgage Broker News, in 2018 Romspen, a non-bank mortgage lender, saw its net investment portfolio grow by 27% to reach $2.6 billion. Net earnings also rose by 62% to end up at $185 million.
“Revenues for the year were $229 million, significantly above the $161 million seen in 2017,” Mortgage Broker News said. “Much of the growth could be attributed to a considerably larger mortgage portfolio.”
Romspen is not the only private lender that experienced growth in 2018. The Teranet Market Insights Report for Q1 2019 found that mortgage switches from other lenders to the big-5 banks in Ontario fell by 5.5% from 2017 to 2018 — or a drop of 8,000 switches. However, mortgage switches in favour of other lenders over big-5 increased from 32.2% in 2017 to 34.3% in 2018.
When looking at the percentage of the Ontario market by mortgage value, Teranet data scientists found that the big-5 market percentage dropped by 2.7% between 2017 and 2018. On the flip side, credit union market percentage rose by 0.8%, private lenders increased by 0.8%, and trust companies went up by 0.7%.
In the percentage of Ontario market by mortgage value, private lenders had an increase of 2.3% between 2012 and 2018, going from 4.4% to 6.7%.
In the sixth edition of the Teranet Market Insights Report, the focus on private lenders continued.
Teranet found that the vast majority of first-time homebuyers in Ontario have selected the big-5 banks for mortgages since 2012, but from 2017 to 2018 there was a drop from 63.2% to 60.6%. In 2018, credit unions and individual lenders hit a seven-year high with 7.8% and 2.1% respectively. Trust companies also experienced an increase from 2017 to 2018 and were the second-most popular choice for mortgages amongst first-time homebuyers with 20.8%.
In some cases, the private lender growth may be attributed to the mortgage stress test regulations (the B-20 guidelines), which were introduced in January of 2018. These guidelines increased the basis point amount that federally-regulated banks must test mortgage seekers by and put an increased focus on the gross debt service (GDS) ratio and total debt service (TDS) ratio. This may have driven some consumers towards private lenders.
CIBC Capital Markets Chief Deputy Economist Benjamin Tal pointed to the advantages for private lenders in his April 16, 2019 In Focus report “Mortgage Stress Test:
The Operation Was a Success, But…”
“…limited funding sources put a cap on their [MICs] ability to aggressively
continue to gain market share,” Tal wrote. “That’s not the case for private lenders. Their funding model does not require short-term credit, they are free from any regulations, and can potentially continue to gain market share. Accounting for more than 50% of the alternative lending space, this segment of the market is where the regulators’ focus should lie.”
In an extremely regulated environment, private lenders appear to be thriving as they can lend outside of the structured box.
Recently the mortgage stress test, along with housing affordability, has been in the news, with calls from prominent industry leaders to modify it. Part of what has been discussed, too, is whether the mortgage stress test should apply to private lenders.
With the federal election coming up in October of 2019, many political parties have been discussing housing affordability and, in some cases, the mortgage stress test.
If the elected party decides to make changes to ease homeownership, private lenders may lose the competitive edge they have gained.
Private lenders can take advantage of the current moment by:
- Sourcing new opportunities and clients through property information tools, such as neighbourhood demographics.
- Validating property data quicker, including finding an estimated property value through an Automated Valuation Model (AVM).
- Mitigating risk by running a Fraud Check report to ensure that only vetted deals go through, leading to more closings.
Purview has tools private lenders can use to boost their business now and in the future. Find them all by calling 1-855-787-8439 or visiting www.purview.ca.
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