Known for their strength and stability, Canada’s “Big Six” banks have long dominated the mortgage market. Today, these and other traditional lenders account for roughly 92% of the country’s mortgage origination activity. Despite their dominant industry position, conventional lenders serve an increasingly narrow segment of mortgage borrowers, leaving millions of Canadians to seek alternative lending services.
For decades, traditional financing solutions provided the vast majority of Canadians with sufficient access to the mortgage market. However, that began to change following the 2008 financial crisis, as stricter lending requirements made it harder for borrowers to qualify for loans. Progressively tighter federal regulations, such as increasing the minimum qualifying rate for uninsured mortgages, imposing strict debt service ratios and more stringent stress tests, and limiting refinancing activities have made it harder for many Canadians to access conventional mortgages offered by the banks.
At the same time, major lenders struggled to keep pace with innovations in the mortgage market, which offered borrowers a greater variety of lending products and faster processing efficiency. As a result, more borrowers slipped through the cracks of traditional lending systems—and many found alternate lenders that understood their unique circumstances better than the major institutions.
Fintech entrepreneurs like CMI Financial Group founder Bryan Jaskolka recognized years ago that the traditional mortgage industry was “ripe for disruption,” and that private capital could fill a crucial void left by the banking industry’s status quo.
Private investors provide alternative financing solutions to borrowers who are typically excluded from traditional lending systems. In the following section, we will take a deeper dive into the reasons for exclusion, the mechanisms through which private investors operate, and the impact on borrowers and the broader financial ecosystem.
The Landscape of Exclusion from Conventional Lending
A growing share of Canadian borrowers have become excluded from accessing traditional mortgage financing. These aren’t fringe cases but include small business owners, startup founders, gig economy workers, individuals with poor credit history, younger first-time homebuyers, existing homeowners looking to refinance, and investors, among others.
The demographics affected by stricter banking regulations have grown since the Office of the Superintendent of Financial Institutions (OSFI) implemented so-called B-20 rules impacting mortgage eligibility. These guidelines made it harder for borrowers to qualify for uninsured mortgages by requiring banks to put borrowers through stringent “mortgage stress tests.”
In 2023, OSFI proposed even stricter mortgage guidelines under B-20, including restricting the mortgage size borrowers are eligible for, limiting debt service coverage, and implementing interest rate affordability stress tests. The regulator launched a public consultation on the matter.
It comes as no surprise that the private mortgage market has grown since OSFI first implemented its B-20 rules in 2018. Data from Canada Mortgage and Housing Corporation (CMHC) shows that the share of new mortgages extended by private lenders increased to 8% in the first quarter of 2023—up from 5.3% in 2021. Over the same period, the share of mortgages lent by big banks declined to 53.8% from 62%.
CMHC believes private and alternative lenders account for roughly 10% to 12% of the country’s mortgage market as of 2023—and that share has been growing in recent years.
Separate data from Statistics Canada showed that the market for Mortgage Investment Corporations (MICs)—a major source of private mortgage financing—grew more than threefold between 2007 and 2021.
Private Investors: Who They Are and Their Motivations
In an interview with The Globe and Mail, Jaskolka explained why private lenders have become such an important funding vehicle for Canada’s mortgage market: “There’s always some curveball, whether it’s a new regulation or a market event. You have to anticipate change and be nimble enough to adjust. It’s a continuous cycle; we anticipate, we innovate, we adapt.”
It’s in the innovation and nimbleness that private lenders stand out from the major banks.
In the context of the mortgage market, private lenders are high-net-worth investors, family offices, institutional investors, and private corporations that provide loans to borrowers. These participants typically invest heavily in alternative investments to generate higher returns and diversify away from public markets, which are known for their volatility. In this context, private mortgages are one of the fastest-growing segments of alternative investment management.
Private lenders aren’t bound to the same stringent regulations and stress tests as the major banks, giving them greater flexibility to set their own standards for mortgage lending—and, critically, the ability to quickly respond to changes in the market.
Like other investors, private lenders are motivated by financial returns, as private mortgages have vastly outperformed other cash-flow-focused investment strategies over the past few decades. A leading private mortgage portfolio, like that of CMI Mortgage Investments, can yield between 6% and 16% annually, depending on its risk profile.
Some private investors are driven by the chance to make a positive difference in people’s lives and communities by offering funding to borrowers who may not meet the criteria for traditional bank loans. This assistance enables these individuals to buy homes, weather a financial emergency, or obtain capital for various needs, ultimately fostering financial inclusion and helping to improve socioeconomic mobility.
These investors also tend to be interested in supporting innovation and having a first-mover advantage in a market that Jaskolka described as being “ripe for disruption.”
Mechanisms of Private Investment
Private mortgage lenders are a diverse group of corporations and individuals who lend out their own capital, usually in the form of short-term mortgages. They provide direct lending to individuals as an alternative to the major banks, so they set their own interest rates and fees, risk management practices, and underwriting requirements. As a result, borrowers find the approval and funding process much easier and more flexible than with traditional banks.
Although private lending can have many forms, mortgage investment corporations (MICs) that pool investor capital are more prevalent and constitute a larger portion of the market.. Because private lenders do not accept deposits from the public, they are not regulated federally. In Canada, private lenders are typically regulated at the provincial level. Each province and territory has its own set of regulations governing private lending activities, including licensing requirements, disclosure obligations, and consumer protection measures.
In Canada, there are two main types of mortgage investment programs: Whole mortgage investing and Mortgage Investment Corporations (MICs). Whereas MICs invest in a pool of mortgages, whole mortgage investment programs offer private investors more targeted investment opportunities, such as funding an entire mortgage transaction, either individually or as part of a small group.
In the case of MICs, an in-house team manages the investment process, including underwriting loans, managing risk, and collecting payments from borrowers. Investors in MICs receive returns based on the performance of the underlying mortgage portfolio
Whole mortgage investors, on the other hand, can fund private mortgages either on their own or through a private lending company, depending on their preferences, resources, and expertise. Dealing with a private lending company offers many benefits, which can enhance the investment experience and potentially improve investment outcomes compared to self-funding mortgages. Private lenders, like CMI, have access to a diversified range of mortgage investment opportunities and specialize in evaluating loan applications, performing due diligence, and managing the ongoing servicing of mortgages. By entrusting their investment to a reputable private lending company, investors benefit from their experience and resources, eliminating the need for them to directly manage individual mortgages.
Case Studies
Private mortgage lenders have become a lifeline for many Canadians, especially following the spike in mortgage rates since 2022. The combination of higher interest rates and elevated housing costs has made it difficult for buyers and existing homeowners to qualify for a first or second mortgage. Even homeowners who have a primary mortgage with a traditional lender are increasingly turning to private lenders for their second mortgages, according to Mark Morris, a Toronto-based real estate lawyer with LegalClosing.ca.
The growing success of private lenders is rooted in flexibility, competitive offerings and the building of strong relationships with investors, brokers and borrowers. Private lenders offer investors competitive fixed-income yields, particularly at times when traditional bond portfolios underperform As a result, private mortgages have emerged as one of the most popular alternative investments. Private lenders have in turn diversified their lending sources, offering flexibility and giving borrowers improved access to capital when they need it most.
One of the best case studies of private lenders’ success is CMI Financial Group, which has emerged as one of Canada’s fastest-growing non-bank financial institutions focusing exclusively on the mortgage market. CMI has experienced consistent triple-digit year-over-year growth over the last five years, and funded more than $2.5 billion in mortgages since inception.
The Future of Private Investment in Lending
Like any other investment opportunity, private mortgage investing requires constant attention to regulatory changes, market conditions, and the ongoing evolution of the alternative lending landscape. The growth of private mortgages was based on identifying and anticipating the need for high-quality financing alternatives—and using innovations in financial technology to modernize lending and make it more transparent.
Looking forward, the private lending market is expected to see new opportunities and challenges due to the rise of artificial intelligence, robo-advisors, open banking, and Web3 payment systems. New methods of wealth creation outside of traditional job categories will likely mean that even more potential borrowers will face exclusion from traditional banking services. As such, private investors are expected to play an ever-greater role in helping borrowers access high-quality financial services.
Investing in private mortgages allows investors to put their capital toward one of the fastest-growing segments of the alternative lending industry. Working with a reputable non-bank lender can ensure that you always stay informed and adaptable to market changes.
Of course, not all private mortgage lenders are created equal. CMI Financial Group is one of Canada’s fastest-growing mortgage lenders, offering industry-leading mortgage investing opportunities. Contact CMI today to explore your investment goals and see how becoming a private lender can work for you.
