OTTAWA, (Reuters) - Household credit in Canada continues to grow faster than income and the tightening of mortgage rules will likely continue to push borrowers to alternative lenders, including credit unions and private mortgage lenders, the Bank of Canada said on Tuesday.
In its semi-annual Financial System Review, the central bank said it will closely monitor developments in private lending, particularly by mortgage investment corporations (MICs) which are growing to meet the increase in demand from borrowers.
Still, it is unlikely MICs will attract a significant share of borrowers affected by more stringent qualifying rules unless they change their business model, the bank said.
“To expand beyond their niche, these lenders would need to further develop their lending channels and, most importantly, develop larger funding sources,” the banks said.
MICs and other private lenders accounted for about 10 percent of all new residential mortgages, including purchase and refinance activity, in Ontario in 2017, the bank said. But because the loans are small, private lending amounted to about 6 percent of the value of new residential mortgages.
The total assets of MICs is between C$10 billion and C$15 billion, the bank estimated.
“Their small share of the mortgage market, limited leverage and risk-based pricing reduce the possibility that MICs will exacerbate financial system vulnerabilities in the short term,” the bank said.
The rise in the use of alternative lenders, who can include wealthy individuals looking for higher returns than offered by traditional investments, has caused some concern that borrowers have shifted to unregulated mortgage providers to avoid the tighter qualification rules imposed by regulators.
The bank noted that the median interest rate charged by private lenders in recent years was 10 percent, well above the 3 percent median rate charged by other lenders, while the loan size was about a third that of other lenders at C$95,000. The median term of a private loan was typically a year, far shorter than the five-year term of traditional loans.
Reporting by Andrea Hopkins and Leah Schnurr