Higher interest rates, tougher mortgage rules drive surge in Toronto private lending

Fraser GengeMortgage Talk Canada

Bloomberg News

October 31, 2018

Twenty per cent of refinancing for mortgage deals in the second quarter were funded by private lenders, a 67 per cent jump from the first quarter of 2016, according to a report Tuesday by Toronto brokerage Realosophy and property data provider Teranet.

Purchasing homes and paying off mortgages are getting harder in Canada’s biggest city due to a combination of rising interest rates, higher home prices and tougher standards to qualify for a mortgage. The new rules require borrowers to prove they can make payments at higher rates and apply to new mortgages as well as refinancings or transfers to a new bank

The changes are a boost to private lenders, which are willing to take on riskier financing arrangements than traditional lenders. In turn, they charge higher interest rates, the report said. The share of mortgages financed by private lenders has increased from a low of 12 per cent in 2016 to 20 per cent in the second quarter of 2018.

Most of these lenders are mortgage brokers who have set up mortgage investment corporations to raise money for lending, John Pasalis, president of Realosophy said in an email.

Total private mortgage volume jumped to $1.5 billion in the second quarter, from $920 million in the first quarter of 2016, the report said. Almost half of private lending activity during that period was on detached homes that were refinanced; the next highest segment was for condo refinancing.

Generation Xers, or people in their 30s and 40s, were the largest group of consumers turning to private lenders, accounting for 42 per cent of all transactions, according to the report. A portion of this increase may be driven by owners who prefer to do major renovations to existing homes rather than moving to a bigger house, the report said. Private lenders are often more willing than banks to provide construction financing.

–With assistance from Erik Hertzberg.

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