Canadian Homeowners Seek Alternatives Amid Rising Mortgage Rates

As the age-old aphorism claims, necessity is the mother of invention. This couldn’t be more accurate for Canadian homeowners, who are now seeking out % alternative lenders for their mortgage needs due to rising interest rates.

According to the latest data from Statistics Canada’s survey of non-bank mortgage lenders, the total value of outstanding loans from alternative lenders hit a staggering $388.6-billion in Q2 2023, reflecting an 18% rise from Q1 2020.

The rise in the adoption of non-bank lenders can be attributed to the struggle of borrowers to qualify for loans from chartered banks amidst increased interest rates. The federal stress test rules have made it even more challenging, compelling borrowers to prove that they can manage their mortgage payments at an interest rate that’s at least two percentage points higher than their actual contract. For instance, with a prevalent five-year fixed mortgage rate of about 6%, borrowers are expected to qualify at 8%.

“While the increasing interest rates definitely put up challenges for borrowers, it also opens up a window of opportunity for alternative lenders who are not tied down by the stress test,” says David Steinfeld from Stonefield Mortgage.

Many homeowners, particularly those with variable rates, are feeling the brunt of the central bank’s key interest rate, which currently stands at 5%. This has driven the monthly payments for some homeowners up by thousands, compelling them to resort to alternative mortgage options or face the daunting task of selling their homes in a market where prices have witnessed a decline. 

“Some homeowners are holding out for better times, resorting to short-term financing to bridge their way to an eventual sale,” states Steinfeld. 

Statistics Canada data reveals a surge in the value of alternative loans, especially since the end of 2021. Consequently, alternative lenders have tightened their qualification criteria, fearing a surge in defaults. Nonetheless, the shift towards alternative lenders marks a notable development in the Canadian mortgage landscape, reflecting a growing resilience among homeowners amidst economic fluctuations.

Interest continues to grow in this space, according to Sharon Marcellus from Statscan’s industrial organization and finance division. “It’s a dynamic market, with the growth index slightly favoring those with lower loan-to-value (LTV) ratios, meaning lenders are putting a priority on applicants with more equity in their homes,” she said.

The housing market is no stranger to upheaval, and Canadians are showing their adaptability, proving that they are more than capable of navigating the turbulent waters of flux in the mortgage scene, with a little help from alternative lending platforms.

What lies ahead for the Canadian housing market remains to be seen, yet it’s certain that creativity, resilience, and adaptability will continue to drive market evolution as Canadians strive to achieve their homeownership dreams amidst a shifting financial landscape. 

Whether you’re a homeowner currently navigating the mortgage maze, or a potential buyer weighing up your financing options, stay updated. Watch this space for more insights into the evolving Canadian real estate market.