With a housing market that’s pricing out many in the Greater Toronto Area and stricter mortgage rules in Canada, private lending is becoming more popular among those looking to secure loans to buy a home — but experts warn there are risks involved.

The value and number of mortgages funded by alternative and private lenders have increased in the past five years, according to the Financial Services Regulatory Authority of Ontario (FSRA), an independent regulatory agency created to improve consumer and pension plan beneficiary protections in Ontario and regulates sectors, including mortgage brokers, loan and trust companies and credit unions.

The agency says the value of mortgages by private and alternative lenders has increased from $13 billion in 2019 to $22.4 billion in 2021 and the number of mortgages rose from 30,435 in 2019 to 36,568 in 2021.

In 2019, t​he ​total value of mortgages brokered ​by licensed brokers in Ontario ​was $139.5​ billion, which means that private lenders accounted for 9.3 per cent of mortgages in the province.​ ​That share of the market rose to 11.6 in 2021, as the overall value of mortgages brokered in Ontario increased to $193 billion that year.​

Zahra Marani, managing partner for real estate and private lending with Marani Law LLP, says her law firm has seen private lending become an increasingly popular option, especially among clients who are looking to refinance a mortgage.

“I’m seeing people who certainly would have been at the bank not so long ago who just have no choice but to turn to private lending,” Marani said.

“Not only are we seeing an increase in the need for private funds, we’re also seeing an increase in the rates that are being agreed upon by the borrowers and lenders and the brokers, because it’s costing more to borrow at the banks.”

For prospective homebuyers, there are two ways to get a mortgage: the traditional financial institutions, like banks and credit unions; and private or alternative mortgages, which are offered by investment corporations or mortgage finance companies.

So why are people turning to the latter?

Antoinette Leung, head of the FSRA’s Financial Institutions and Mortgage Brokerage Conduct, says the demand for private mortgages has increased in large part due to the current housing market.

Leung says more stringent underwriting guidelines by federally regulated financial institutions, as well as self-employed individuals who may not have a steady income, have also been a factor in turning people away from traditional mortgages to private lending options.

“These are quite well established lenders with sophisticated processes [who] have experience with underwriting all the way down to individuals who may have extra money to invest,” Leung said.

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“So, you really have a range and we’re seeing an increase over the last few years.”

The reason? An alternative mortgage lender has different lending criteria than big banks and could provide a way to get a loan when an individual doesn’t meet the requirements for a conventional mortgage.

But going with a private lender comes with risk as well. Experts say the rates can be higher, and customers need to do more due diligence about who they’re borrowing from.

A CBC News investigation this week revealed Paradise Developments Inc. — a licensed developer building homes in GTA communities — has been trying to prevent a number of individuals and companies from collecting deposits for homes in its developments.

The unlicensed and unregistered companies identified were also claiming they could offer 30-year private mortgages with interest rates as low as 2.75 per cent and low down payments — something Marani, the real estate lawyer, says “has red flags all over.”

Consumers should beware of fees, penalties
The FSRA found consumer protection concerns in private mortgage examinations, in particular with those who may be more financially vulnerable and could be taken advantage of in these transactions.

The agency says mortgage agents should know the financial needs, circumstances, goals and expectations of their clients — both borrowers and private lenders.

Leung says consumers should beware of fees and penalties when entering into a private mortgage agreement.

Marcel Ghazouli, a licensed mortgage broker with Premiere Mortgage Centre, says he’s also noticing more clients borrow from private lenders often at sharply higher interest rates than would be available through a bank.

“It has picked up as of late as rates have been increasing and also due to the after effects of the pandemic, whether that’s life changes related to work, health [or] family issues,” Ghazouli said.

Ghazouli says private lending, which is typically short-term loans that can be anywhere from a year to 18 months, are designed to “bridge the gap between one scenario and the next,” such as moving from a private lender back to a more traditional institution, such as a bank.

“What many people don’t realize is that these private mortgages don’t automatically renew once they’re up for renewal,” he said.

“The lender can impose a renewal fee. So that’s something that should be asked and clarified during the process so that they know what they’re up against.”

Qualification for mortgages ‘a concern’

In July, the Toronto Regional Real Estate Board (TRREB) revealed overall sales fell 47 per cent from the same time last year.

“Over the last couple of months, we’ve seen historic increases in mortgage rates and we’ve [also] seen rates increase quite dramatically,” said TRREB president Kevin Crigger in an interview with CBC Toronto.

The board said sales in July, which amounted to 4,912, were almost half the 9,339 homes sold the same time last year.

Crigger said while he personally hasn’t seen a large amount of clients turning to private lenders, “qualification definitely is a concern for some and people are qualifying for less,” as the mortgage stress test continues to increase along with interest rates.