In the Canadian mortgage market, there are three major classifications of mortgage lenders:
A – Traditional (prime) lenders (chartered banks, virtual mortgage houses)
B – Non-conforming or sub-prime lenders
C – Private lenders
Borrowers should understand all aspects of the mortgage market before they set out to get a home loan, and that includes learning the ins and outs of the unregulated mortgage market.
What is the Unregulated Mortgage Market?Basically, the unregulated mortgage market is made up predominantly of private lenders, whether they are individuals or companies, which loan out funds to borrowers who need a loan. There are no stringent regulations that govern this market, hence the name.
In a regulated mortgage market, on the other hand, banks and other traditional lenders are required to adhere to federal regulations that oversee the industry. More specifically, it is the Office of the Superintendent of Financial Institutions that governs the regulated mortgage market, which sets forth specific rules that financial institutions in this market must follow.
Private lenders that are not under the regulated mortgage market umbrella typically loan out funds on a shorter-term basis and charge higher interest rates compared to lenders in the regulated mortgage market sphere.
Why Do Borrowers Choose to Borrow Within the Unregulated Mortgage Market?Borrowers who are unable to get approved for a traditional mortgage often turn to the unregulated mortgage market to secure a home loan. Mortgages have become increasingly difficult to get approved for because of the tightened criteria that borrowers must meet. Those who do not meet such requirements are often left scrambling trying to find other avenues to get the mortgage they need to finance a home purchase.
Since private lenders in the unregulated mortgage market do not have to follow the same set of regulations that financial institutions in the regulated mortgage market do, they’re more flexible with their lending criteria. Essentially, private lenders in this realm have more freedom and flexibility to work with whomever they choose.
Why is the Regulated Market So Difficult to Get into Right Now?Over the past few years, several regulations have been introduced into the mortgage industry that were specifically designed to help reduce the odds of defaults on mortgages by lowering the amount of overall mortgage debt. The higher the amount of mortgage debt, the higher the chances of borrowers defaulting on their mortgage payments.
Current mortgage regulations have been implemented in an effort to curb this effect and reduce risk levels associated with over-lending to borrowers who may not be capable of repaying their home loans.
In addition, recent rules regarding mortgage “stress test” have made it even more difficult for borrowers – especially first-time homebuyers – to get approved for a mortgage. As of January, this year, uninsured borrowers applying for home loans from federally regulated lenders must now go through a “stress test” to make sure they would be capable of repaying their mortgages if rates increased at some point in the near future.
More specifically, borrowers must be put through a test assuming interest rates increase by two percentage points, compared to where they are today, to see if they would still be able to contribute to their mortgage payments. It’s estimated that about 18% of borrowers would fail the stress test.
Since increasingly stringent regulations and new rules for stress tests have made it tougher for Canadians to qualify for a home loan, borrowers have contributed to the growth of the unregulated mortgage market by seeking out alternative ways to obtain a home loan.
Benefits of Getting a Mortgage from a Private LenderFor borrowers who don’t quite meet the criteria to get approved for a mortgage from a federally regulated lender, opting to work with a private lender may by the only alternative. There are plenty of benefits of getting a home loan from a private lender in the unregulated mortgage market:
Less red tape. Traditional banks have a lot of regulations to follow and overhead to deal with. The application process can be quite cumbersome, both for the banks and borrowers. There is certainly a ton of mortgage bureaucracy involved in the regulated mortgage market, which is not necessarily the case with the unregulated mortgage market. Private lenders, on the other hand, can offer a more streamlined approach for borrowers to secure a mortgage.
More flexibility. Banks are only able to offer borrowers certain types of mortgages that their own lenders offer. Instead, private lenders offer more flexibility with their mortgage products, giving borrowers something that can be more tailored to their specific needs.
Less Stringent lending criteria. Borrowers typically need to meet very strict lending criteria in order to get approved for a mortgage in the related mortgage market. On the other hand, private lenders have a higher tolerance for risk and therefore their lending requirements tend to be less stringent.
Faster loan approval. It can sometimes take weeks to get approved for a mortgage in the traditional market. In the unregulated mortgage market, however, private lenders are typically able to loan out money a lot faster than traditional banks.
For Canadians who are unable to get approved for a mortgage in the traditional market, there is always the unregulated mortgage market to consider. This can help borrowers who would otherwise have been turned down for a mortgage realize their dreams of homeownership. Having said that, there are still some inherent risks associated with getting a home loan from a private lender; namely, higher rates. Before you secure a mortgage, be sure to do some homework with your broker.
How Do Private Mortgages Work?
Not everyone can qualify for a mortgage these days. Government regulations targeting down payments, investment properties and high-ratio buyers mean that more Canadians won’t qualify for a home loan.
Do you find yourself frequently paying bills after their due dates, bouncing cheques or receiving
calls from collection agencies? These can all be warning signs of debt becoming unmanageable.