MICs and other private lenders currently account for 10% of all new residential mortgages in Ontario. This number will surely increase in the short-term as buyers look for alternative lenders not governed by OSFI. For savvy real estate entrepreneurs, investing in private mortgage vehicles in the coming years will provide stability and robust yield amidst this backdrop of rising rates and tightening regulations.
Real estate investors woke up to an entirely new lending landscape on January 1st. Now, they must meet stricter guidelines to qualify for lending as part of a new policy instituted by the Office of the Superintendent of Financial Institutions (OSFI).
The result is that all mortgage applicants must prove they can still afford payments at a higher interest rate -- the greater of either 2% above the qualifying rate or the five-year Bank of Canada benchmark rate (currently 4.99%).
As you are likely aware, this stress test was already in place for low-ratio mortgages, but now extends to all loans governed by OSFI regulations. Credit unions and private lending entities are not subject to OSFI regulations, but more on that later.
The Bank of Canada has said that these new regulations will affect about $15-billion in borrowing, primarily in the hot Toronto and Vancouver markets. This change holds important implications for first-time homebuyers in these markets, but what does it mean for investors like yourself?
But that’s not all
The above regulation changes are not the only game in town, we are also in a rising interest rate environment with further increases projected.
Indeed, CMHC predicts that the posted 5-year mortgage rate will fluctuate between 4.9%-5.7% throughout 2018, and rise to a range of 5.2%-6.2% in 2019. This is a big deal!
A search for yield amidst change
According to the Bank of Canada, the new rules will disqualify about 1 in 10 borrowers, and in places like Toronto and Vancouver, this ratio rises to 1 in 8. This will drive borrowers to other lending options such as private lending and mortgage investment corporations (MICs). This reality present a great opportunity for investors looking for yield in the coming years.
Bank of Canada Governor Stephen Poloz believes that “people might also look for a lender that is not bound by these new mortgage rules so they can avoid facing the stress test.” This is where private lending comes in.
Bryan Jaskolka, Vice President at Canadian Mortgages Inc., notes that this environment will drive potential buyers to creative financing options. “Instead of settling for cheaper homes, holding off on home-ownership, or being forced into unfavourable lending terms, many home-buyers will move to creative financing options like private lending and MICs.” Indeed, RBC Capital Markets concurs, stating recently that it believes that its borrowers who don’t meet the new rules will turn to private lenders and MICs.