Borrowers moving down credit ladder for mortgages

Alternative lenders report boost to business in wake of new stress test for would-be homebuyers

Mortgage brokers say the borrower rejection rate from large banks and traditional monoline mortgage lenders has gone up as much as 20 per cent after Canada’s banking regulator imposed a new stress test for homebuyers who don’t need mortgage insurance.

As a result, alternative lenders are seeing an uptick in business as brokers increasingly direct homebuyers toward borrowing options that are beyond the reach of the Office of the Superintendent of Financial Institutions’ (OSFI) newly enacted tighter lending requirements.

Clients who don’t meet the bar are turning to private lenders, mortgage investment corporations (MICs) and credit unions, which are provincially regulated and not required to implement the stress test, said Carmen Campagnaro, president of Pro Funds Mortgages in Burlington.

Campagnaro is one of the brokers who said rejected loan applications to tradi- tional lenders have risen by 20 per cent since Jan. 1, when OSFI mandated a new stress test for uninsured borrowers, or those who have more than a 20-per-cent down payment.

Private lender Fisgard Asset Management Corporation in Victoria is seeing an influx of borrowers and “better-quality business,” said Hali Noble, its senior vicepresident of residential mortgage investments and broker relations.

The guidelines, known as B20, are aimed at curbing risky lending amid rising household indebtedness and high home prices in some markets.

Superintendent Jeremy Rudin has said OSFI is aware the stricter rules could have unintended consequences, such as sending borrowers toward more risky lenders out of the regulator’s purview.

“We can’t control what we can’t control,” he said in October.

Robert McLister, a mortgage planner at IntelliMortgage, agrees.

“The demand is shifting down the ladder, so you have these less regulated lenders with higher risk tolerance now seeing materially more business. And they can charge more, and they can be pickier with the types of borrowers that they lend to.”