A new report from the Canada Mortgage and Housing Corporation (CMHC) reveals that in 2018 the Canadian mortgage market saw its weakest growth rate in more than 25 years.
The Residential Mortgage Industry Report pointed to increasing interest rates, stricter lending regulations, and a softening real estate market as reasons for Canada’s slowed mortgage growth rate.
Data shows that compared to the previous year there was a 19% decrease of new mortgages for the purchase of property in 2018. And the slower pace of residential mortgage growth continued into the first quarter of 2019, at just 3.4%.
Along with tighter underwriting criteria and non-underwriting criteria, higher borrowing costs as well as modest economic conditions, the report also mentions that behaviour factors likely contributed to the mortgage growth decrease.
The slowed mortgage growth led to softer demand on new home and resale markets in Canada. For example, Canadian housing starts in 2018 saw a 3% dip below 2017’s 10-year high. Additionally, the resale market also saw a decrease of 11% compared to the previous year.
Uninsured mortgages and the use of alternative lenders in Canada were also examined in the report. At 75%, banks still account for the largest market share of mortgage lenders in Canada. Credit unions and caisses populaires account for the next largest share at 14%, while mortgage finance companies have 6%. Mortgage investment corporations and private lenders come in with the smallest portion, at 1% of market share.
More Uninsured Mortgages in Canada
According to the report, the share of uninsured mortgages in Canada has been rising, increasing from 29% in 2016 to 35% in 2018. As the report explains:
“The increasing shift to uninsured mortgages is partly a result of lenders and borrowers adjusting to regulatory changes, notably the 2016 stress testing for high-ratio mortgages, as well as changing economic conditions. Homebuyers must meet stricter conditions in order to qualify for mortgage insurance… the implementation of the new eligibility criteria resulted in a decline in the demand for mortgage portfolio insurance.”
The increasing gap between uninsured and insured mortgage originations comes from regulatory changes, fluctuating economic conditions, and adjustments to portfolio insurance, according to the report. In 2018, fewer than 1 in 3 new mortgage loans came from insured mortgage originations.
Canadians Look to Alternative Lenders
With stricter lending rules in place, more Canadians are seeking mortgages from alternative lenders. Unlike federally and provincially regulated financial institution mortgages, the mortgages from these lenders are not under the regulators’ scope.
According to the CMHC, Canada had between 200 and 300 alternative lenders last year, holding 1% of the outstanding mortgages in Canada. This amounted to between $13 billion and $14 billion of the total Canadian mortgage market. In contrast, alternative lenders held between $11 billion and $12 billion of outstanding mortgages in 2017; in 2016, it was between $8 billion and $10 billion.
Alternative mortgage corporations normally have terms between six and 24 months. Last year, the range of lending rates from these alternative mortgage lenders was between 7.3 and 11%. In comparison, banks offer terms that normally span several years, with 3.3 to 5.3% rates as of last year.
Alternative lenders can be found across Canada, but the report noted that they seem to be more concentrated in B.C. and Ontario. Vancouver properties and Toronto real estate alone account for 78% of alternative lending.
More stringent lending regulations have contributed to a market where many Canadians do not qualify for a mortgage through traditional lenders, nor do they qualify for insured mortgages. This has led to a decrease in home buying in many cases, as well as an increase in borrowing from alternative lenders and taking on uninsured mortgages, which sometimes poses additional risk to a borrower.
Whether a borrower is getting a mortgage through a traditional lender or an alternative one, it’s important to read carefully and understand the lending terms.