Private second mortgages can help brokers sidestep harsher tests

Brokers are now considering the viability of secondary loans with private lenders in response to new federal mortgage rules that took effect last week, which mandated tighter tests to determine a borrower’s capability to service debt at the Bank of Canada’s 5-year posted rate of 4.64 percent.

These private secondary mortgages will allow brokers to bypass the “stress test” requirements, Reuters reported. Circumventing the stricter tests means that aspiring buyers will have to take out uninsured mortgages, which require 20 per cent down payment—and in turn might force consumers to go for unregulated private loans to secure the funds needed.

“[The stress test] pushes Canadians into private second mortgages, and it's just costing more and more money for these people," Toronto agent Mark Cashin said.

Cashin predicted a significantly increased number of private secondary mortgages in the near future, despite these charging anywhere between 7 to 10 per cent interest.

“It's not a good option but maybe it's the only option we've got,” Toronto private mortgage fund operator Ron Alphonso said. “It's a way to get around the new rules.”

The regulatory changes might have inadvertently opened the door for alternative lenders to occupy an increasingly larger portion of the mortgage market, observers cautioned.

“[Consumers] are going to turn to these unconventional lenders and pay higher prices and it's not just going to be a higher price for one year, it could be a higher price for three, four, five years,” Credit Counselling Society chief executive Scott Hannah said.

“They want to get into the market, in some cases at any cost, and the cost is going to be a very high mortgage payment.”

MBN

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