Hopeful home buyers who fail to qualify for their desired mortgages under the stricter “stress test” can still go for smaller financial companies not backed by mortgage insurance—provided one is prepared for rates much higher than the Bank of Canada’s 5-year posted rate of 4.64 per cent.
Toronto mortgage broker Marcus Tzaferis said that rates from these alternative lenders can go as high as 8 to 11 per cent, a price that might prove appealing to those who fail the “stress test” for having insufficient earnings but are expecting to get raises in the future.
“Does it make sense to borrow money in order to circumvent the rules? It’s not just an easy yes or no. Who is our borrower? It’s individually subjective, and it’s all influenced by the property market,” Tzaferis told Global News.
The reason for these rates is the much greater level of risk, as these institutions are not covered by the new mortgage rules.
“The problem with all the smaller guys is that they have a higher interest rate than the bank,” Toronto private mortgage fund operator Ron Alphonso said. “The government doesn’t want problems, because the taxpayer pays for it eventually. But the private guys, and the smaller funds are not backstopped. They must assume all risk themselves.”
Alphonso added that these lenders are regionally-based, and operate in the $5-50 million range.
The federal regulatory changes, which took effect on October 17, mandated the standardization of lending criteria, including the implementation of a tighter “stress test”. The new rules also included provisions for the closing of tax loopholes for capital gains exemptions on principal residence sales, along with the adoption of a new risk-sharing model for lenders.