Article content continued

Yana Papanyan, vice-president of credit and underwriting at First Swiss Mortgage Corp., which is a major player when it come to helping this subprime segment of the market, says in a typical situation, a client might buy a property worth $1 million but only have $100,000 downpayment. First Swiss Mortgage will provide the other $100,000 under a second mortgage starting at 12.99%.

“Clients have to top up to 20% to get a bank to approve. We are filling that gap between what the client has as a downpayment and what the bank will accept,” said Ms. Papanyan. “About 80% of [First Swiss’ mortgages] in Vancouver are high-priced properties.”

First Swiss is not regulated by the federal government; that interest rate is considered competitive based on risk factors including the fact it is a second mortgage behind the bank’s debt.

Why was $1 million chosen anyway?

One positive for these people is they do not end up paying mortgage default insurance, which can be as much as 3.15% of the value of a mortgage, based on current CMHC guidelines.

Benjamin Tal, deputy chief economist with CIBC, says rising prices and the $1 million government threshold is sending more consumers into the subprime market to borrow money. He estimates alternative lenders, who are major beneficiaries of that subprime market, now underwrite 2.2% of all mortgage loans, with the market having grown by 25% over the past year.

“When you say $1 million, people think ‘that’s extremely high expensive properties.’ They are not. This [restriction on loans for homes worth $1 million or more] is leading to less regulated entities entering the market,” said Mr. Tal, adding his data for Ontario shows that people are borrowing just to get the downpayment.

Mr. Tal also wonders whether Ottawa is going to have revisit the rules on whether it is willing to insure homes worth than $1 million.

“It’s a legitimate question. Why was $1 million chosen anyway?,” said Mr. Tal. “This is probably not consistent with the spirit of what they want to do, because the spirit of CMHC is to make housing affordable for young people.”