Why Calgary homeowners turn to private lenders
Short-term financing helps struggling homeowners refinance, possibly avoid foreclosure, but it's not cheap
More Calgary homeowners are turning to private lenders to help refinance their properties, re-establish credit or consolidate debt, according to mortgage brokers, private lenders and the Real Estate Council of Alberta.
What isn't known is just how many more private mortgage loans are being approved, but the Canada Mortgage and Housing Corporation is for the first time trying to track the numbers.
What is known is that it can be a costly option.
The city's slower than hoped for recovery is part of the reason, but so, too, are new mortgage rules that make it more difficult to get a loan from a bank.
While private lenders may provide a lifeline for some homeowners, it can be a costly option for people who are already struggling to recover from Alberta's economic downturn.
Private lenders charge much higher interest rates than the banks and may charge extra fees.
But private mortgage loans can offer short-term relief for property owners who are scrambling to maintain ownership — and cannot get approval from a traditional bank.
"The private lending industry is really designed to be that in-between resource to help borrowers and homeowners if they hit a financial bump in the road," said Dean Koeller with Calvert Home Mortgage Investment Corporation, a long-time private mortgage lender in Calgary.
Koeller's company approved approximately 500 loans last year, after receiving approximately 6,000 applications. He says they are short-term loans ranging on average from 12 to 18 months. He says it allows people to improve their credit rating enough to hopefully qualify for a mortgage from a bank.
"So the type of people we're seeing are homeowners that have lost their job or they've had to take a lower paying job, so they may have higher debt loads," said Koeller.
They are riskier loans — and that's why private lenders charge more. Koeller's website advertises rates ranging from 8.5 to 15.5 per cent with minimum fees starting at $1,500.
"My investor groups take on the full risk of a loss of a mortgage," Koeller said.
He says new mortgage rules, notably the stress test for buyers brought in 13 months ago, are putting the squeeze on some people who are looking to buy a home or renew an existing mortgage.
He estimates the changes have reduced people's buying power by 20 per cent.
The stress test requires the homeowner to prove they can afford payments at a qualifying interest rate that is typically higher than the actual rate in their mortgage contract.
Credit unions and other lenders that are not federally regulated do not need to use this mortgage stress test.
He says there is an upside to the tougher mortgage rules — property values, for the most part, have held steady, ensuring existing homeowners have some equity in their properties.
'Longer period of stress'
Koeller says some Calgarians have been facing a longer period of stress because of Alberta's sputtering economic recovery.
"This economic downturn has been longer and more prolonged so people have been stretching themselves further," he said.
And some Albertans have gone under, financially.
According to the most recent number of bankruptcy and consumer proposals filed during a 12-month period ending November 2018, consumer bankruptcies and proposals reached 14,427 in Alberta, up eight per cent compared with the same 12-month period ending November 2017.
Albertans are also carrying a lot of debt. For people under the age of 65, debt has more than doubled from 2005 to 2016, to an average household debt of $247,900.
Koeller says the amount of private mortgage loans in Western Canada has gone up anywhere from $100-$200 million per year for the last several years since 2010.
For his company, only a dozen homeowners defaulted on their loans, forcing Koeller and his team to commence foreclosure proceedings.
Use caution, due diligence
The registrar of the Real Estate Council of Alberta says it deals with mortgage brokers who represent private lenders on a regular basis, but it can't pinpoint the exact reason for the increase.
"Whether that's driven by the stress test or whether that's driven by the availability of funds in the marketplace, I mean both of those are factors," said Charles Stevenson.
He advises buyers to work with real estate and mortgage professionals and a lawyer who specializes in real estate to ensure their interests are being protected.
Stevenson says that while a private mortgage loan may cost more than one provided by a bank, private lenders "open up certain avenues for borrowers."
Koeller says his company's goal is to improve a buyer's financial situation. He's heard from people who are skeptical.
"There's certainly a perception in the private lending industry that there are predatory lenders that do take advantage of borrowers that are in difficult situations," he said.
"We're very dedicated to helping the client where they need help. And we're not going to put a client into a less favourable situation by using the type of products we use," said Koeller.
More details on private loans may be released later this year.
CMHC says it is working on collecting data from private lenders in collaboration with StatsCan and a report may be released in the summer.
Bryan Labby is an enterprise reporter with CBC Calgary. If you have a good story idea or tip, you can reach him at email@example.com or on Twitter at @CBCBryan.