The private lending industry has seen rapid growth over the past year, spurred by the B-20 rules that were implemented in January 2018, . The country’s financial regulators made it harder for buyers to qualify for loans, prompting some to borrow private money at a higher interest rate.
Canada is now considering extending the stress test to private loans, to further protect the housing markets against a recession.
Regulatory boards from the country’s central bank, federal housing agency and finance ministry have noted the recent expansion of private lending, and warned against the threats it poses to economic stability.
Private lenders account for one tenth of Canada’s $1.5 million mortgage market. Economists believe the new regulations have simply transferred risk to private lenders. If a high proportion of private loans end up defaulting, it could impact the overall housing market.
Private lenders are not currently subject to the B-20 rules, since they are supervised by provincial regulators rather than the OSFI.
Private lending is on the rise
Private lending in Canada is led by MIC’s – Mortgage Investment companies, that lend private money to homeowners who have been rejected by traditional banks.
MICs which lend up to 90% of a property’s value, and generally charge annual rates between 10% and 20%. In comparison, traditional banks offer rates of 3%-5%. Investors in MICs are typically offered returns of 6% to 10%.
Private lenders accounted for 8.7% of Toronto’s residential mortgage market in mid 2018, according to BoC data. Should the percentage of deregulated mortgages creep above 10%, it could have pose significant risks to the macro-economy.
What are some options being discussed by regulatory boards?
One option would be for the provinces to subject private lenders to the B-20 guidelines as per the federal government’s request.
Private lenders would need to qualify borrowers at 200 basis points above their contracted rate.
Alternatively, a less drastic solution would be for provinces could recommend private lenders to run tighter checks on their borrowers, shopping short of imposing the actual stress test by law.
A final decision on the plans has yet to be made.
Source: Huffington Post.
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