How Shadow Lending May Fuel the Market

Despite a lot of discussion about the stress test lately, I’m still seeing quite a lot of activity in the market during the first two weeks of January. Perhaps all of this activity is a result of a combination of low listings and high demand. That, or it’s the fact that there are many alternative solutions around the stress test. One alternative is applying for a fixed rate mortgage instead of variable, or another one is what we’ll be talking about in this Insight Article: Shadow Lending.

Money Under the Table?! The words “shadow lending” sounds a bit sketchy upon first read. If I didn’t know better, I would think it’s someone lending another person some cash in a dark alleyway behind a restaurant somewhere, all hidden through an extended trench coat (or maybe I’ve just been watching too many movies!).

Although the terminology may not sound the best, it’s simply a terminology for a transaction that is not regulated by the federal government. In Canada, we are regulated by OFSI; these are the folks who implemented the stress test.

Technically, if your parents lend you some money for a down payment, this is also considered as shadow lending. So really, it’s not as bad as it sounds.

The five big Canadian banks are regulated by OFSI, and it is highly probable that you bank with at least one of them. However, you can get access to shadow lenders using a good mortgage broker who doesn’t work at a big bank. Do not worry though, as many of these shadow lenders are regulated by the provincial government instead of the federal government.

What Stress Test? After talking to a few mortgage brokers, it sounds like there has been an increased demand for getting approvals from the non-major banks and private sources for buyers to purchase a property. This leads to me think that the demand for home buyers is high enough that they are seeking alternative sources to get their funding for their purchases.

So What’s the Catch? Some of the conditions for these shadow lenders are not as bad as what you may think. Yes, the interest rates may be a couple of points higher and there may potentially be a lender fee as well, but it’s between that or not being able to own a home for the rest of your life. The former is probably an easier pill to swallow for most people.

Do remember though, once enough equity is built up in the property, there is always an opportunity to take it to a major bank for your next mortgage.

What This All Means – With the stress test bringing shadow lenders into the forefront of many buyers’ minds, shadow lending could become more of a mainstream solution. This means that the so-called buyers who have been priced out of the market with the stress test are, in actuality, still able to be in the market through shadow lending. As a result, the demand will still be here for those who want to own a property badly enough.

As I’ve been preaching in the last little while, this stress test really isn’t that big of a deal. If you’ve been a bit taken back by the stress test and are hesitating to buy thinking that prices will drop as a result of the stress test, I would recommend for you to reconsider and give it a second thought. This could be the perfect opportunity to buy when the general consensus is that the stress test will have a monumental negative effect on the market. Remember, consensus is built into the price. If it’s deemed as a safe investment, prices go up and the returns are lower or completely gone.

Until Next time, Happy Real Estate-ing,


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