Mortgage providers are tightening their lending requirements — and fewer Canadians are qualifying

Qualifying for a mortgage is becoming harder as private lenders tighten the purse strings and adjust their requirements due to drastically falling home prices and rapidly rising interest rates, experts say.Typically, prospective homebuyers have turned to private mortgage lenders when they’re unable to qualify at a Canadian bank. It can be a more attractive option as private lenders don’t require a stress test, unlike federally-regulated banks. In a stress test, buyers must prove they’re able to afford a mortgage rate two per cent higher than the current rate. For a private lender, the central determining factor to give out the loan is the borrower’s equity, or total assets — whereas banks evaluate equity, income, and credit.Private lenders, also called subprime lenders, became a popular option during a housing boom marked by fast rising prices and historically low interest rates.But now, some private mortgage lenders are requiring that borrowers pay higher down payments, or have more equity in their homes, and it’s leaving some home buyers in a bind. “When there are concerns of a recession, people become more conservative with their spending,” said Ralph Fox, broker of record and founder of Fox Marin Associates. “We’re seeing that with private lenders. They’re pulling back from the marketplace and are only taking on secure investments.” MCF Mortgage Investment Corp., which provides loans to Ontario homeowners, suspended new loan applications for two weeks in October after being flooded with new applicants. Canadian banks are also cracking down on lending due to falling home prices and rising interest rates, resulting in a deluge of borrowers turning to private lenders. “We have less capital to lend out to new clients,” said Robert Pirie, MCF Mortgage’s chief operating officer. “We have to tighten our requirements to pay back the investors.” MCF Mortgage is a mortgage investment corporation (MIC) which means the lender is financed by capital from investors, as well as repaid funds by borrowers. Most people get their private mortgages from MICs. Pirie said the goal is for clients to only use MCF Mortgages for a few years before moving to a Canadian bank — private lenders are typically used to improve a borrower’s credit and financial history to then qualify at a bank, which provide cheaper mortgages with lower interest rates. However, Pirie is noticing clients staying at his business for longer, unable to qualify for the stress test, which currently comes in at seven to eight per cent. Interest rates offered by private lenders can also now top eight per cent.In the summer, one of Canada’s most prominent nonbank lenders, Magenta Mortgage Investments, paused mortgage applications.“We adjusted our underwriting criteria to accommodate the increase in interest rates, including some of our higher loans-to-values product offerings,” said Albert Oppenheimer, chief operating officer of Magenta Mortgage Investments. “We are seeing a steady inflow of new applications daily and we can meet the demand.” Many private lenders are now requiring borrowers to have more equity in the home by adjusting the loans-to-values ratio — meaning lenders provide up to 75 per cent of the value of the home when it used to be 80 per cent. That results in a buyer paying a 25 per cent down payment, up from 20 per cent. Larger down payments of 30 per cent to 35 per cent are possible, said Jonathan Alphonso, mortgage agent at Mortgage Broker Store. Last week, Canadian real estate lender Romspen Investment Corp. halted redemptions on its largest fund after a number of borrowers stopped making payments, meaning investors can’t take their money out.This is happening to more private lenders, said Alphonso, resulting in smaller loans for borrowers who then need to make up for the shortfall.Many lenders are also no longer providing a second mortgage, which used to be the majority of the business for private lenders, added Alphonso.“Buyers looking to take out a second mortgage will find it very difficult as it’s a much riskier investment and buyers need to have at least 25 per cent down payment saved, which is hard. Most people calling us don’t have that,” Alphonso said. Christopher Molder, principal broker at Tridac Mortgage, said he is having to increasingly turn away more borrowers who are unable to meet the tightened requirements and is looking for more strength in the borrowers to justify the loans. If someone qualified for a private mortgage two years ago, they won’t qualify today, he added. Buyers who can’t qualify with a Canadian bank and were hoping to qualify at a private lender, will find themselves with hardly any options, said Marin. “It leaves home buyers in the dark,” he said. “It’s hard when people are trying to change their circumstances in a shifting market. It doesn’t leave them with many options.” Clarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca