A growing number of homeowners chose alternative lenders last year, as new mortgage growth reached its slowest pace in 25 years. This comes amidst government interventions aimed at improving the housing market, according to a new report.

In the report by Canada Mortgage and Housing Corporation (CMHC), it revealed that alternative lenders, which accepts clients with riskier profiles for shorter terms at higher interest rates, held one per cent of Canadian mortgages last year.

There were about 200 to 300 active alternative lenders in Canada last year holding $13 billion to $14 billion of outstanding Canadian mortgages. A slight increase from $11 billion to $12 billion the previous year and $8 billion to $10 billion in 2016.

The data suggests that “their share in this space is growing,” saidTania Bourassa-Ochoa, a specialist in housing research with CMHC.

Typically, loans from alternative lenders include terms with a lifespan of six months to two years and in 2018, they offered juicy interest rates between 7.3 and 11 per cent, with an average of 8.99 per cent. In contrast, banks offered 3.3 per cent to 5.4 per cent rates on mortgage loans with terms that generally lasted several years.

However, the report noted that alternative lenders were a safe haven for people with riskier profiles. Their clientele spanned acrossthose who are self-employed, borrowers who need short-term cash due to health issues, poor credit history, divorce or other related challenges, and investors carrying more than one property.

Therefore, such mortgages had higher delinquency rates than those provided by other lenders and by the third quarter of 2018, the delinquency rate for alternative lenders was 1.93 per cent, according to the report. During the same period, mortgage finance companies, credit unions, caisses populaires and banks all reported delinquency rates at 0.25 per cent or lower.

Laurie Campbell, CEO of the non-profit agency Credit Canada, said the rise in alternative lending gives serious cause for concern as the short terms and high-interest rates put people in a vulnerable position, especially with growing interest rates.

Being that many of these borrowers are those who could not qualify for a bank mortgage they are at a higher risk, she said. They are likely to get into a situation where mortgage rates are higher when their term is expired, and at this point, not even alternative lenders will renew their mortgage, she noted, forcing them to sell their property.

Campbell suggests thatpotential homebuyers who are desperate to get into the housing market but fail to be approved by a traditional lender should determine what disqualified them—such as a low credit score—and how to fix it going forward.

Additionally, if they chose to sign a mortgage with an alternative lender, they need to understand that it would cost a lot more in the long run. There are Toronto certified mortgage brokers whose aim is to make it easier for you to make these important decisions by helping you to understand the various options available to you—and their respective advantages.

In an April report from CIBC's deputy chief economist, Benjamin Tal, he raised concerns over the increase in alternative lenders in Ontario. They made up nearly 12 per cent of transactions in Ontario in 2018 and about 15 per cent in Greater Toronto, according to the report.

Still, alternative lenders account for almost seven per cent of the market based on dollars, considering the average loan size is about half the size of bank loans. Previously, alternative lending was part of a normally functioning mortgage market, but it is not suitable for a fast-growing segment, said Tal.

However, Bourassa-Ochoa said there is really no cause for alarm as a one-per cent market share is still a relatively small amount.

“We're going to have to monitor how these numbers are changing in time in order to really see and understand more clearly if there is a vulnerability and what it is,” he said.

2018 witnessed the slowest year-over-year growth in total mortgage debt in more than 25 years, due to stricter government lending rules, higher borrowing cost and other factors, according to the report. Mortgage debt grew by between 3.4 per cent and 5.2 per cent, now with a steady pace of 3.4 per cent in the first quarter of this year—a decline from between 5.2 per cent and 6.2 per cent in 2017 and 6.1 to 6.5 per cent in 2016.

The report is the first of its kind by the CMHC, who plans on producing it on an annual basis while providing quarterly updates.

“This report is really looking at filling so many missing pieces of the residential mortgage landscape,” said Bourassa-Ochoa, adding that businesses, policymakers and other members of the public can utilize the data to make more informed decisions.