Alternative Lenders to Possibly Face Stress Test
Posted By: Rachel Kavanagh
Alternative Lenders to Possibly Face Stress Test – Canada is considering applying the same mortgage stress-test rules that face the banks onto alternative lenders to prevent housing markets from being destabilized by the lenders’ rapid growth.
Currently, private lenders are not subject to the new stress test rules because they are supervised by provincial regulators rather than the Office of the Superintendent of Financial Institutions (OFSI). Bringing them under federal supervision would require a change in the law.
Officials from the department of finance, the financial regulator’s office, the central bank and the federal housing agency have discussed whether the alternative lenders’ expansion over the past year poses a threat to economic stability.
A few measures were discussed as to how to limit the growth of alternative lender use. One option would be for the federal government to ask provinces to apply the stress-test guidelines themselves. A second is to recommend provinces ensure private lenders run tighter checks on the ability of their borrowers to repay loans.
Alternative lenders, typically groups of wealthy individuals, currently account for around 1/10 of Canada’s $1.5 trillion-dollar mortgage market. The main driver of private lending growth has been mortgage investment companies (MICs). The MIC’s, which lend up to 90% of a property’s value, typically charge borrowers annual rates above 10% and sometimes as high as 15% to 20%, compared to the 3% to 5% offered by conventional banks.
Alternative lender use has accelerated since rules introduced by the country’s financial regulator last year made it harder for banks to grant loans. The Bank of Canada published data last November showing alternative lenders accounted for 8.7% of Toronto’s residential mortgage market at the end of June 2018. This was up from 5.9% a year ago.
On January 1, 2018, OFSI introduced a new mortgage stress test to those individuals who provide down payments greater than 20%. Applicants will also be required to qualify for the higher of Bank of Canada 5-year qualifying rate (currently 5.34%) or the mortgage holder’s contracted rate + 2%.
When the new stress-test rule was implemented it essentially transferred risk from the banks to the alternative lenders. These lenders are now more exposed if markets turn because they lack the capital buffers that banks hold and lend out a higher proportion of a property’s value.
Overall, if the Government of Canada does move forward with regulating alternative lenders, it will end up diminishing the buyer’s ability to purchase a home.
* Alternative Lenders to Possibly Face Stress Test. written by Benczik Team Realty
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