Unregulated lenders are doling out more short-term loans tied to property investments, and that might amplify a Canadian home price downturn, one economist warns.
Stephen Brown, senior Canada economist with Capital Economics notes that non-regulated lenders, known as mortgage investment corporations (or MICs for short), accounted for 2 percent of the mortgages borrowers took out last year in the country.
Yet just 1 percent of total mortgages owing come from this unregulated sector, suggesting non-regulated lenders were busier last year.
Loans from these lenders come with high interest rates — in certain instances upwards of 15 percent, plus fees — and are generally offered for short time periods, sometimes as little as six months.
It’s earned them the title of “lenders of last resort,” notes Brown.
Because of these high costs and short timeframes, it doesn’t make much sense for new homebuyers to take advantage of these loans to purchase a property.
“Instead, it’s likely that the stress tests in addition to the sharp deceleration in house price inflation in the past 18 months have made previously credit-worthy borrowers look riskier,” writes Stephen Brown, in a recent report.
“Seeking refinancing to avoid having to sell their assets during the recent sales slump, individual and corporate investors that have been unable to rollover their existing loans with regulated lenders seem to have instead turned to MICs,” he explains.
Such attempts could leave property owners in the clear with loans and interest paid off — but that would require steeper home price gains, Brown suggests.
As of June, the average price of Canadian home was $505,500, an increase of just 1.7 percent from the same time last year.
Beyond potential struggles in store for these higher-risk borrowers, home prices could take a hit as properties are listed in fire sales.
“MIC marketing documents often claim that the short duration of their loan portfolios mean that they are less vulnerable to the risk of future declines in property prices,” Brown writes.
“At the market level, however, the increasing use of short-term loans raises the risk of forced selling that pushes down prices significantly,” he concludes.
Last-Resort Lenders are Making a Bigger Splash in Canada’s Mortgage Market by Josh Sherman | Livabl