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How mortgage brokers are working with new rules

Oct 29, 2016

The recent new lending rules were initiated by Ottawa due to the concern of rising house prices particularly in Toronto and Vancouver coupled with the fact that Canadians are increasing their debt and a sharp rise in mortgage rates could be detrimental to homebuyers.

The new rules risk pushing borrowers into the shadow lending market to circumvent the tests on the ability to repay debts. Brokers are planning to direct more borrowers to the shadow lending market where private investors, discouraged by low interest rates on their savings are able to lend at rates that can see a return in the double digits. Home Trust is already offering a “bundled” product , twinning a conventional mortgage with a second loan by private lenders, which allows buyers to borrow up to 85% of a property’s value.

With the new rules stating that buyers with less than a 20% down payment are required to take a test to qualify based on the Bank of Canada 5 year rate (normally 2 % higher than the bank’s posted rate) buyers can use a private lender to avoid the new rules. Toronto Mark Cashin said “ this pushes Canadians into private second mortgages and is costing more and more” He has arranged such deals before and expects to see more with the new rules. Private second mortgages typically charge between 7 and 10 per cent in interest.

Ron Alphonso, a private mortgage lender said “It’s not a good option but maybe it’s the only option we’ve got”. Ron arranges mortgages for borrowers who cannot get financing from mainstream banks. “It’s a way to get around the new rules,” he said. He is also looking to pool together a group of private investors to invest around $50 million offering mortgages to borrowers that don’t pass the new tests at annual rates of between 4 to 6 per cent.

Debt counselors said the rules could allow aggressive alternative lenders to take a bigger share of the market. Scott Hannah , chief executive of Canada’s Credit Counseling Society said “ They are going to turn to these unconventional lenders and pay higher prices and not just for one year, it could be three, four, five years.”

Buyers want to get into the market, in some cases at any cost, and the cost will be a very high mortgage payment.

Article Adapted from Matt Scuffham & Allison Martell Financial Post