Alternative Lending Continues to Grow in Canada

CIBC’s chief economist Benjamin Tal argues the alternative lending space continues to grow, a result of the B-20 mortgage stress test. For those unaware of alternative lending, it’s essentially the place you go when you can’t get a loan from a traditional bank, usually because your credit sucks. Unsurprisingly this space has been growing as highly indebted Canadians in need of more debt to pay off existing debts are now being turned down at banks, largely thanks to regulators saying enough is enough. Per CIBC and Equifax, alternative lenders account for close to 12% of the total number of transactions and about 15% for the Greater Toronto Area. A year ago, that number was close to 10%. Unfortunately nobody has done the research for Vancouver but one has to think its in the same ballpark.

As I have written before a huge chunk of this growth is being propelled by your average Mom & Pop homeowner tapping their existing home equity at 3-4% and lending it out at 9-10% and leveraging that spread. Of course this type of phenomenon can only be achieved in a low interest rate environment where central banks have suppressed interest rates, thus pushing investors further out on the risk curve in order to obtain any real yield. Thus it is no surprise that individual lenders account for just over 50% of all alternative lenders, while institutional lenders—mostly Mortgage Investment Corporations (or MICs) account for the rest. Meanwhile, its estimated that only 10% of individual lenders are family-related loans.

While I am certainly in favour of the mortgage stress test, Tal certainly makes a compelling argument that the rise in short term, high interest rate loans from private lenders makes the entire system inherently more unstable. Particularly as home values fall and lenders decide not to renew loans, forcing people into foreclosure. This is already playing out in highly illiquid areas such as West Vancouver and Vancouver’s west side. Although, across Greater Vancouver new foreclosure listings still remain very low, so Tal is probably a bit premature to be hitting the panic button.