The Future Looks Bright for Alternative Lending in Canada

Thanks for reading?Lasting Financial Security,?a daily series of financial stories covering various economic, market, and real estate perspectives that could impact your financial security. I aim to give you the information necessary to make informed decisions to safeguard your wealth. -?Adrian Spitters, Private Wealth Advisor, PFC Wealth Solutions.

Want to stay in the know??Subscribe to this series using the button above.

If you like the stories I write, please share. It helps get the information out to people who may benefit.

Let me know what you want to hear about using #LastingFinanciaSecurity in the comments below. Let's get started…

Canada's alternative and private lending spaces have seen meteoric growth in recent years as more borrowers get squeezed out of the regulated space. However, the industry faces hurdles in securing sufficient investor funding to meet demand. According to experts, the solution lies in collaboration, data sharing and a focus on sophistication.

The Surge in Popularity of Alternative Lending

The alternative lending sector has exploded in Canada as qualification requirements from regulated lenders become increasingly strict. Even borrowers with solid credit are now turning to private lenders for solutions.

Mike Forshee, President of alternative lender Glasslake Funding, notes that the space is "on the cusp of breaking out." The number of creditworthy borrowers unable to qualify with traditional lenders continues to rise. This leaves ample opportunity for private lenders to fill the void.

Industry research shows that the demand is certainly there. A 2022 MPC survey revealed that 31% of mortgages in Canada are now originated by alternative lenders, up from just 19% in 2016. The share of alternative mortgages jumped to a whopping 39% in Ontario specifically.

But Forshee warns that, in their current state, options remain limited for borrowers seeking alternative lending solutions. Many desire high loan-to-values and low rates - a combination that does not appeal strongly to investors.

The Funding Gap That Threatens Future Growth

Despite booming demand, the alternative space faces a growing funding gap. The preferences of borrowers and the needs of investors are mismatched.

On the borrowing side, demand centers on highly leveraged loans with low rates for short terms. But investors seek yield, duration and strong credit quality. This dichotomy curbs investor appetite.

"When you have an investor coming into the market, and your ask is of them to take the highest risk and the lowest return, it doesn’t really whet the investor’s appetite to stay in the long term," Forshee explained.

Without inflows of stable, long-term funding, the alternative market cannot thrive. Originate and sustain the loans needed to service underserved borrowers.

Longer Loan Terms Offer Greater Security

Forshee advises that short 1-year terms do borrowers a disservice in today's climate. Stricter qualification requirements make it increasingly difficult for borrowers to "graduate" back to mainstream lending once their alternative loan matures.

This contrasts with the past when alternative loans served as a temporary solution before borrowers refinanced into cheaper conventional mortgages.

But today, borrowers locked into cycles of short-term renewals face constant instability. Longer 3-5 year terms with alternative lenders provide greater security. They match the investment duration sought by funding partners as well.

A Shift Towards Sophistication Through Collaboration

In Forshee's view, the solution lies in industry collaboration and an emphasis on sophistication. Lenders must look beyond isolated challenges and individual gain.

Instead, aligned standards for data sharing and best practices can strengthen the alternative space holistically. This will boost investor confidence and funding inflows to better serve borrowers.

Forshee points to the open data environment in the U.S., which enables robust predictive modelling and analytics. Canada's alternative lending sector can evolve through similar open data practices.

He explains, "We don’t all have to be egotistical and just stay in our own shops. I think there’s a way we can share data, share best practices where in turn, that shows the alternative segment in Canada is much more sophisticated to the end investor – we know what we’re talking about."

The Outlook Shines Bright for Alternative Lending

With strong collaboration and a shift to data-driven sophistication, Canada's alternative lending industry is primed for sustainable growth. A transparent, partner-focused approach will attract the long-term funding needed to serve the growing number of underserved borrowers.

The future success of alternative lending hinges on the ability to align incentives for borrowers, lenders and investors alike. When all players work together towards common goals, entire industries can thrive.

For personalized advice on protecting your wealth in these uncertain times, consider consulting a? Private Portfolio Manager who will allocate up to 35% of your investments into alternative income-producing assets like private debt, mortgages, and private real estate. Contact me at (604) 613-1693 or at?[email protected]?to learn more.

If you like my articles and want to receive my top stories of the week in your inbox, consider subscribing to?Wealth Solutions for a Changing Economic Landscape Newsletter.

Credits: How can private and alternative lenders meet the needs of a growing market?

#alternativefunding #privatelending #collaboration #datapartnerships