First National Financial LP

Residential Market Commentary - Rising rates have Canadians looking at alternatives

  • First National Financial LP

Rising interest rates in Canada have triggered a change in home buyers.  Mortgage brokers across the country have noticed more and more of their clients are opting get their mortgages through credit unions and private lenders.

Figures compiled by show these alternative lenders have handled about 6.7% of Canada’s mortgage business so far this year, compared to about 3.7% for all of last year.

Both fixed and variable rates are rising.  Fixed rates are going up because of increasing yields on the 5-year Government of Canada bonds, that the rates are based on.  Fixed rates are currently running at about 4.0%.  Variable rates are rising because the Bank of Canada is increasing its benchmark lending rate.  Variable rates, are now averaging about 2.5%.

In both cases, home buyers who are getting their uninsured mortgages through one of Canada’s big banks (or any federally regulated lender) are subject to the federal government’s stress test. It forces buyers to qualify for a mortgage at a higher rate; either 5.25% or their contract rate plus 2.0%, whichever is higher.

Even though these rates are closer to traditional, normal rates, they can make qualifying tougher, and they reduce purchasing power.

Mortgages taken through credit unions and private lenders, which tend to be provincially regulated, avoid the stress test.  The alternative lenders also tend to be more flexible which can make it easier to qualify.

But alternative lenders are not relegated to just those buyers who are having trouble qualifying.  Brokers are reporting that well qualified borrowers are choosing them to get better rates or bigger loans.