Nearly a third of Canadians are considering alternatives to traditional lenders: survey

With Bank of Canada’s (BoC) aggressive rate hikes over the past year and stricter mortgage qualifying requirements, homeownership continues to be increasingly challenging for many Canadians.

Given the high interest rate environment, Canada Housing and Mortgage Corporation (CHMC) reports a growing trend of alternative lending, with one in three mortgage borrowers now renewing with an alternative lender.

According to a recent Leger survey, conducted on behalf of BNN Bloomberg and RATESDOTCA, 47% of homeowners or prospective homebuyers are concerned about renewing their mortgage or qualifying for the amount needed to buy a home. And among these respondents, 29% are considering alternatives to traditional lenders.

Nearly half of Canadians are concerned about renewing their mortgage or qualifying for a mortgage loan

Four in ten (41%) Canadians are either current homeowners with a mortgage (36%) or plan to purchase a home within the next year (5%). Those with household earnings of $100,000 and above are more likely to be in this group. This group also includes 22% of Canadians whose mortgage is up for renewal in the next two years.

Among those with a mortgage or those who intend to buy, nearly half (47%) are concerned, and 16% are very concerned about renewing their mortgage or qualifying for the amount needed to purchase a home. Of those that plan to purchase in the next 12 months, 71% are concerned about qualifying for the mortgage amount they need, while 34% are very concerned.

“After almost a year of rate hikes and rising inflation, many people are finding themselves in a tough financial position,” says Victor Tran, a mortgage expert at RATESDOTCA.

Sixty per cent of respondents from the age demographic of 18-34 are concerned about qualifying for a mortgage loan as compared to 47% and 29% of their counterparts in the age group of 35-54 and 55 and above, respectively. Of respondents who make less than $60,000 a year, 56% are more likely to be concerned about mortgage loans or renewals. But only 38% of those who make more than $100,000 are concerned about their mortgages.

Looking at timelines, concern is highest among respondents who plan to purchase or renew over the next 12 months (71%) versus the 53% who are planning for the next two years.

On the other hand, the remaining half are not concerned about qualifying for or renewing their mortgage. Seventy per cent of these respondents belong to the age group of 55 and above, 59% earn more than $100,000, and 62% don’t have immediate plans to purchase or renew their mortgage.

Nearly a third are considering alternatives to traditional lenders

Among those with a mortgage or those who intend to buy, 29% are looking at alternatives to traditional lenders. Twelve per cent say they would consider asking family and friends for money, 11% would consider a subprime or private lender, and 8% would consider a monoline lender or credit union.

Just over half (55%) of those who are planning to qualify for a home within the next 12 months — and 33% of those renewing their mortgage within the next two years — are more likely to consider alternative lenders. Notably, men between the ages of 18 and 34 are also more likely to consider alternative over traditional lenders.

Among the 56% respondents who are not considering alternative lenders, 78% fall in the age group of 55 and older and 62% earn more than $100,000. Sixty-five per cent don’t have immediate plans to purchase or renew their mortgages.

On a $500,000 mortgage and a 25-year amortization period, a five-year fixed rate uninsured mortgage holder (locked in at 2.89% in the beginning of 2018) would’ve been paying $2,338 in monthly payments. At the current rate of 4.49% and a 20-year amortization period, the homeowner can expect to pay an additional $348 per month.

To renew with a different lender, the homeowner would have to qualify at a rate of almost 7%.

“If you can’t qualify to purchase a home or renew your mortgage, an alternative lender can be an option,” explains Tran.

Traditional versus alternative lenders: What are the risks?

Traditional or prime lenders are typically big banks and credit unions. However, in order to qualify for a mortgage loan with a traditional lender, the borrower must meet stringent eligibility requirements.

This means a credit check, assessment on employment and income history and how much debt one holds, and passing the mortgage stress test. The mortgage qualifying rate is either the benchmark rate of 5.25% or the rate offered by the lender, plus 2% — whichever is higher.

Alternative or B-lenders include monoline, subprime, and private lenders. Those who haven’t been able to secure a mortgage loan with a traditional lender – including individuals who are self-employed, have a poor credit history, or high debt – may be able to acquire one with an alternative lender, but at a cost.

“It’s often more expensive to go with an alternative lender,” Tran says. “There may be extra costs involved in the initial setup, and interest rates are going to be higher than what is available at a traditional lender.”

“While alternative lenders can be helpful, they should be considered as a short-term, rather than a long-term solution.”

When choosing to go with alternative lenders, the CMHC recommends having a well-defined exit strategy in place.

Another way to guarantee the lowest rate is to compare mortgage rates from among multiple providers.

Methodology

An online survey of 1,527 Canadians aged 18+ was completed between March 17 and 19, 2023 using Leger’s online panel. This sample is subsequently filtered to 666 homeowners with a mortgage or those who plan to purchase a home within the next year. No margin of error can be associated with a non-probability sample (i.e., a web panel in this case). For comparative purposes, though, a probability sample of 1,527 respondents would have a margin of error of ± 2.5 %, 19 times out of 20 while a probability sample of 666 respondents would have a margin of error of ± 5%, 19 times out of 20.