Canada's mortgage brokers find ways around new lending rules

Thu Oct 20, 2016 1:31pm EDT
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By Matt Scuffham and Allison Martell

TORONTO (Reuters) - Canada's new mortgage rules risk pushing borrowers deep into the shadow lending market, with brokers set to line up secondary loans with private lenders as a means of circumventing tests on borrowers' ability to repay debt.

Canadian officials have become increasingly alarmed by systemic risk from record household debt levels and a frothy housing market. In the latest bid to cool the red hot Vancouver and Toronto markets, Ottawa's new rules require lenders to stress test borrowers' ability to pay back loans at levels higher than current rates.

As a way around them, brokers are planning to direct more borrowers to the so-called shadow lending market where private investors, frustrated by low interest rates on savings accounts, are eager to lend at rates that can enter the double digits.

These combined loans take borrowers up to the kind of loan-to-value ratios that were common in the United States prior to the 2008 subprime mortgage crisis.

Canada's biggest non-prime lender Home Trust is already selling a "bundled" product, twinning a conventional mortgage with a second loan by private lenders, which enables home buyers to borrow up to 85 percent of a property's value.

The new rules that took effect on Oct. 17 require buyers applying for an insured mortgage to show they can afford to pay it back at the Bank of Canada's five-year fixed rate of 4.64 percent. Canada's biggest banks currently offer mortgages at rates about two percentage points below that.

To bypass that test, buyers can make a 20 percent down payment that qualifies them to take out an uninsured mortgage. Brokers said many buyers will turn to unregulated private loans to enable them to make that payment.

"It pushes Canadians into private second mortgages, and it's just costing more and more money for these people," said Toronto broker Mark Cashin, who has arranged such deals in the past and expects to see more under the new rules.   Continued...

A man crosses the street in front of a mortgage brokerage office above a bakery, on Danforth Avenue in Toronto, Ontario, Canada on September 17, 2013.   REUTERS/Chris Helgren/File Photo