More Canadians seek unregulated lenders to beat mortgage stress test

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Ever since the mortgage stress test was introduced by Ottawa last year, banks have been feeling the pinch. This new mortgage stress test is being blamed for at least half of the decline in new mortgages started last year, according to a new report by CIBC that calls for the measure to be revisited amid a falling housing market.

“You usually need to be in a recession to see household credit rising this slowly,” deputy chief economist Benjamin Tal wrote. “And most of that slowing is happening in the mortgage space — not exactly surprising, given the ongoing adjustment in the housing market.”

The total value of new mortgages fell by eight per cent or $25 billion in 2018, Tal wrote in the report released Tuesday.

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He estimates the impact of the new stress test made up $13 billion to $15 billion, or 50 to 60 per cent, of that drop. The other 40 to 50 per cent of the drop comes from increasingly unaffordable home prices and rising interest rates, he said.

Home sales have continued to fall in Canada since a slew of new federal and provincial government measures was introduced. The Canadian Real Estate Association released figures Monday showing home sales in March fell to their lowest level for the month since 2013. Sales through the Multiple Listing Service fell 4.6 per cent compared with a year ago, while the average sale price fell 1.8 per cent on a year-over-year basis to $481,745.

It came into effect last year and requires homebuyers to prove that they can service an uninsured mortgage at a higher rate than they qualify for in order to receive a loan from a federally regulated lender.

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The test also doesn’t consider that borrowers’ incomes are likely to rise throughout their mortgage term, that borrowers who take on longer mortgage terms decrease risk and that borrowers pay back a significant amount of their outstanding principal over the term.

Lastly, the B-20 contributes to a rise in alternative lending, the report found, which transfers risk from a regulated to a less-regulated segment of the lending market.

Alternative lenders accounted for nearly 12 per cent of the total number of transactions in Ontario in 2018, according to the report. That’s up from close to 10 per cent in 2017 or a roughly two per cent rise since B-20 came into effect.

Just over half of those lenders are individuals, according to the report, with institutional ones, like mortgage investment corporations, making up the remainder. The report estimates 10 per cent of the private lenders are family members. -CINEWS

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