Interest rates plummeted to record lows at the onset of the COVID-19 pandemic – but now they’re back on the rise across Canada, a trend that’s seeing a marked shift towards the private and alternative lending spaces among many borrowers.
Changes last year to stress test guidelines meant that a growing cohort of borrowers now have to qualify at higher rates than before (the higher of 5.25%, or the contract rate plus 2%) and find themselves increasingly turning to lenders that can often offer flexible solutions.
That trend is likely to continue and grow in the coming years.
“Higher interest rates mean higher qualifying rates for the stress test, so I think that will definitely factor in on people’s buying power with more restrictions on the bank side of things, it is going to open up the private space a lot more.
“The opportunity to grow in this space is going to be great for business going forward. The” A” market is changing, and you need to evolve as well, to get to that “B” space.”
At the end of May around 6.7% of Canada’s mortgage business so far in 2022 came from private lenders or credit unions, a sizeable increase over last year when those lenders made up just 3.7% of overall mortgage funding.
It’s clear that many Canadians’ eyes have been opened to the viability of private solutions, especially as lenders in that space are often able to offer quick turnarounds that sometimes aren’t available through more traditional lenders.
That’s something we’re seeing more of because of the recent rate increase and the higher stress test qualifying rate.
“We can step in and fund deals quickly to help out in the purchasing process. It’s a good short-term solution to get the purchase completed and then work towards getting back to the A space.”
That’s proven popular among borrowers, Thompson said, not least because it means they’re now able to close on a home purchase without losing a deposit, something that can happen when they can’t secure funding from their first-choice lender.
As many lenders become more conservative and ramp up their qualification criteria, Pillar is ready to help borrowers who suddenly find themselves refused a mortgage by those organizations, said Thompson – for instance, in the business-for-self (BFS) arena.
With a chronic lack of supply still a clear problem in Canada’s housing market, the importance of construction is only set to grow in the coming years – and Pillar is well placed to assist borrowers in need of construction financing, Thompson said, with that representing one of the company’s best-established niche products.
“Construction is still going strong,” he pointed out. “We’re a solution-based lender, and we’re here to help borrowers in any situation. If it’s business-for-self, if it’s a quick close, if it’s a construction, there’s plenty we can do to find the right solution.”
Interest rates are rising, and borrowers are finding it more difficult to qualify for a mortgage – not least because there’s little sign that home prices are falling dramatically across most of Canada’s regional housing markets.
Those factors mean that alternative and private lending solutions for Canadians are only set to grow in popularity, according to Thompson, and he said that brokers should recognize the strong potential for business that exists for them in the space.