The Financial Services Regulatory Authority (FSRA) is raising alarm bells over growing risks in Ontario’s private mortgage sector.
Its recently released Private Residential Mortgage Lending report raised concerns about the growing reliance on private mortgages, particularly among borrowers who may not have a clear exit strategy.
While FSRA recognizes the important role private lenders play in providing access to credit for underserved borrowers, it also warns that the rapid growth of this segment—often catering to higher-risk clients—could create serious challenges for both consumers and the broader financial system if not properly managed.
“Financially vulnerable individuals may be more impacted by the potential risks of getting a private mortgage,” the report notes. “As the market share of private mortgage lending has increased over the past decade, FSRA needs to better understand the extent of such risks and consumer behaviours to ensure it has effective supervision strategies in place.”
One concern highlighted by FSRA is the lack of exit strategies among borrowers using private lenders.
In a January 2023 survey of Ontario homeowners, 43% of those who relied on a private lending company or individual private lender admitted they did not have a plan in place to transition back to a traditional mortgage.
“This is concerning because this differs from previous observations where private mortgages are typically used for short-term financing until the borrower is able to qualify for traditional financing,” FSRA noted.
The growth of private mortgage lending
Private lenders, often seen as the “lender of last resort,” have become essential for borrowers with poor credit, self-employed individuals with variable incomes, and those seeking to finance non-traditional or high-risk real estate.
Once a niche market, private mortgage lending has grown rapidly in recent years, driven by rising interest rates, high home prices, and stricter qualification rules from Canada’s major banks.
While total mortgage originations have dropped significantly since peaking in 2021, private mortgage originations continued to grow, reaching their peak in 2022. As a result, the decline in private mortgage lending has been less pronounced, leading to an increased market share for private lenders.
In 2023, private lenders represented 16.8% of all mortgages, up from 13.5% in 2022, according to FSRA. Their share of the total mortgage value also increased, reaching 13.3% in 2023, compared to 10.0% the previous year.
Here’s a look at the growth in specific private lender segments:
- Non-individual private lenders saw the largest gain in market share, accounting for 9.3% of the total number of mortgages and 6.3% of total mortgage value in 2023. This marks a significant rise from 2022, when they held 7.4% of the total number and 4.6% of the total value of mortgages.
- Individual lenders saw their market share in 2023 reach 6.0% of the total number of mortgages and 5.7% of the total mortgage value, up from 4.7% and 4.3%, respectively, in 2022.
- Investment firms experienced the smallest increase in market share, accounting for 1.5% of the total number of mortgages and 1.2% of total mortgage value in 2023, compared to 1.4% and 1.1%, respectively, in 2022.
FSRA’s regulatory actions
FSRA has taken several proactive steps to address the risks in the private mortgage sector and ensure better protection for consumers and investors.
One of the key measures was the implementation of enhanced licensing requirements, for all Ontario brokers and agents involved in private mortgage transactions. These new requirements include mandatory education on private mortgages, designed to increase awareness of the specific risks and complexities associated with this type of lending.
FSRA has also made private mortgages a focal point in its recent mortgage brokering sector supervision plans. These plans involved examining brokerages that reported transactions with private mortgage lenders in their Annual Information Returns (AIRs) to ensure compliance with regulations and protect borrowers from potential missteps.
The regulator also collaborated with the Mortgage Broker Regulators’ Council of Canada (MBRCC) to develop principles for conducting mortgage product suitability assessments. This collaboration led to the release of FSRA’s final Mortgage Product Suitability Assessment Guidance in June 2023, aimed at ensuring consumers receive mortgage product recommendations that align with their financial needs and circumstances.
FSRA said it plans to continue monitoring and analyzing Ontario’s private lending market, with a commitment to publishing this report annually. Based on emerging trends—whether they signal concern or stability—FSRA will adjust its regulatory approach as needed.
“FSRA remains committed to protecting consumers through proactive public education, robust industry supervision, and collaborative efforts,” it said.
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Last modified: September 14, 2024