From 2015 to 2019, alternative lenders were the fastest-growing segment in the Canadian mortgage industry. We’re exploring the alternative lender segment in a series of pieces to better understand potential risks.
The first piece in this series focuses on effective exit strategies.
Fast Facts:
- The majority of alternative mortgage borrowers (72%) had an effective exit strategy in place in 2020. This means that they were able to get a loan with a conventional lender at the term of their alternative loan (64%) or sell their property without defaulting or the property being foreclosed (8.5%). This share remained stable in 2021.
- Properties with an alternative lender lien represented 80% of foreclosures in Ontario.
- Foreclosures dropped significantly in 2020 (from 63 in 2019 to 23 in 2020) likely due to mortgage relief measures and lockdown measures, which put some activities on hold.
From 2015 to 2020, more homebuyers in Canada turned to alternative lenders. Factors leading to this include:
- greater demand
- rising housing prices
- low-interest-rate environment
The alternative lender portfolio increased from an estimated $9 billion in 2015 to $15 billion in 2020.
Growth slowed significantly during the COVID-19 pandemic. This is because alternative lenders reacted to rapidly changing market conditions that led to numerous investors requesting equity redemptions.1
The steady growth of alternative lending before the pandemic and its unconventional underwriting practices have raised questions regarding the potential to introduce new vulnerabilities into the housing finance system. This is especially a concern in regions where alternative lenders’ have a large market share, such as Ontario (figure 1).