In the modern era of homeownership, potential borrowers are offered a plethora of options when it comes to choosing their mortgage lender. Surprisingly, a significant number are veering away from traditional banking establishments in favour of alternative lending institutions such as credit unions, mortgage brokers, and large companies that specialise in residential mortgages. This change in trend is particularly noticeable among individuals who are grappling with financial difficulties or those who are self-employed. Given these circumstances, it begs the question: Does The Mortgage Lender You Choose Matter?
The Shift to Alternative Lenders
In the past, the majority of mortgage claims were lodged by Canada’s five largest traditional banks. However, data indicates a decline in this trend from 55% in 2011-2012 to 52% in 2013-2014. Simultaneously, there’s been an increase in mortgage claims filed by alternative lending groups, with brokerage based mortgage lenders alone accounting for over a quarter of all insolvency claims (26%). This change in lending dynamics suggests that alternative lenders are carving a significant niche for themselves in the mortgage market.
High-Risk Mortgages and the Role of Alternative Lenders
Studies reveal that brokerage based mortgage market lenders have the highest average claims of all lending groups among insolvent homeowners. This is accompanied by a mortgage encumbrance rate of 91%, indicating a higher risk ratio for consumers. In other words, while all insolvent debtors had high ratio mortgages, those who secured their loans through a broker exhibited the highest risk ratio. This, coupled with substantial credit card debt, resulted in these debtors having the highest total-debt-to-income ratio among all borrower groups.
The Role of Smaller Banks and Non-Bank Lenders in Debt Consolidation
Interestingly, lenders belonging to Group C (credit unions, trust companies, and traditional non-bank financial institutions) and smaller banks had a smaller average mortgage claim. However, this does not imply that debtors who sourced their mortgages from these lenders had less debt. Instead, data suggests that these lenders are the go-to choice for debtors seeking second mortgages or debt consolidation loans.
Almost one-third (30%) of debtors who held a secured mortgage with a Group D lender also held another mortgage (or two) with other lending groups. This trend was mirrored among smaller bank borrowers. What’s more, this group of borrowers, who are more likely to have more than one mortgage, were also heavy users of payday loans.
The Debt Cycle and the Role of Lenders
This trend of accumulating debt upon debt is often a strategy employed by insolvent debtors to keep up with their existing debt payments. This typically starts with a costly debt consolidation loan and culminates with multiple payday loans, leading to a crushing debt pile that often results in insolvency.
Does The Mortgage Lender You Choose Matter? The Verdict
The increasing availability of alternative lending products for Canadians is a positive development. Mortgage brokers can often secure competitive interest rates, making borrowing a more affordable venture. However, this also means that borrowers can qualify for larger mortgages than they can realistically afford, pushing them into the high-risk borrower category.
Our data clearly shows that any high ratio mortgage, when combined with other unsecured debts, significantly increases an individual’s risk of filing insolvency. Therefore, Does The Mortgage Lender You Choose Matter? Yes, it does. It’s crucial for potential borrowers to consider not just the interest rate offered but also the long-term manageability of the loan.
