Canadian home buyers are increasingly considering credit unions and private lenders to secure mortgages as rates rise, brokers say.
They are seeing more Canadians drawn to these lenders as fixed mortgage rates have crept to about four per cent in recent months in many provinces and territories.
Because the qualifying rate on uninsured mortgages under Canada’s stress test is either two percentage points above the contract rate, or 5.25 per cent, whichever is greater, more borrowers are now having to qualify at a higher rate for mortgages from traditional lenders like banks.
However, credit unions and private lenders are often able to offer more competitive rates, even to clients who don’t qualify for mortgages offered by traditional lenders.
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“If a client’s looking for a five-year, fixed rate mortgage, they’re now qualifying (with traditional lenders) at say 6 or 6.5 per cent, which really reduces the total amount that they could qualify for,” said Sung Lee, a Toronto mortgage broker.
“With credit unions, they offer more flexibility, where you could qualify at just your five-year contract rate or in some cases, if it’s a variable, like a contract (rate) plus one (per cent).”
Insurance and financial website Ratesdotca says credit unions and private lenders made up about 3.7 per cent of the country’s mortgage business last year and have already handled about 6.7 per cent so far this year.
Credit unions are typically responsible to members instead of shareholders and though they offer similar products to banks, they are not subject to the same federal regulations, including qualifying rate restrictions, allowing them to take on riskier customers.
Housing market slowing
The varying interest comes as the Canadian Real Estate Association (CREA) said the national average home price was slightly higher than $746,000 in April, up 7.4 per cent from about $695,000 during the same month last year.
However, on a seasonally adjusted basis the national average home price slid by 3.8 per cent to $741,517 last month from $771,125 in March.
CREA attributed much of the slowdown to fixed mortgage rates, which have been on the rise since 2021, but have been more impactful in recent months.
“Everyone’s all worried about the rates … because we’ve been accustomed to really low rates for a long time and probably for the last 10 years they’ve been under four per cent,” said Chantal Driscoll, a Burlington, Ont. mortgage broker with RDM Financial Consultants.
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“People are getting nervous, but traditionally mortgages should be between four and six per cent. Those are normal mortgage rates.”
Anytime mortgage rates edge up and qualifying for a mortgage becomes harder, she notices a “trickle down” effect on credit unions and private lenders, but current conditions aren’t pushing interest in these lenders beyond what she usually sees, when the market shifts.
However, she is seeing more interest from people who are not qualifying for mortgages from traditional sources.
“They’ll go to … credit unions or private lenders to qualify a little more than what they’d qualify for with the bank,” said Driscoll.
Most of her clients are still managing to qualify under current conditions or through variable rates, even as they also rise, but Driscoll foresees change.
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She believes brokers may be fielding even more requests for alternative mortgages in the future because at least one credit union has upped their requirements so all borrowers have to qualify at two per cent higher than the contract or the benchmark rate, whichever is higher.
Meanwhile, Nick Hill has seen a steady stream of interest around credit unions from his clients — and not just ones who are having trouble qualifying.
“I did two deals for people who work at car dealerships,” said the Toronto broker with G&H Mortgage Group. They qualified for a traditional loan but found better rates through a credit union.