Private Mortgages During COVID: Looking Back at Ontario 2020-2021

The pandemic changed a lot about borrowing in Ontario. Interest rates fell sharply, banks offered payment deferrals, and the housing market went on to set sales records. This article looks back at the parts of that period that can be confirmed from public sources, and what they meant for borrowers who considered private mortgage financing as a short-term option.

We have left out anything we could not confirm from a public source, including how private lenders as a group changed their lending in spring 2020 and how court processes were affected. Those details varied by lender and by court step, and we are not in a position to describe them reliably.

Spring 2020: Rate Cuts and Relief Measures

The Bank of Canada cut its overnight rate target three times in March 2020: to 1.25% on March 4, to 0.75% (announced March 13, effective March 16), and to 0.25% on March 27.123 Ontario declared a provincial emergency on March 17, 2020.4

The federal government also introduced the Canada Emergency Response Benefit (CERB), which paid $2,000 for each four-week period a person qualified for, covering periods between March 15 and September 26, 2020.5

Payment Deferrals: Relief With a Cost

At the federal Finance Minister's request, banks widely extended the option to defer mortgage payments for up to six months, according to the Financial Consumer Agency of Canada (FCAC). The FCAC also noted that the interest on a deferred payment is typically added to the mortgage balance, so the borrower pays interest on it later.6

That is a useful reminder for any borrower considering a deferral: it moves payments to later, and it can raise the total cost. A private lender is a separate business with its own mortgage contract. If you hold a private mortgage and your circumstances change, speak with your lender early and read your mortgage terms.

When 2020 Income Looked Different

For many self-employed people, 2020 was an unusual year for income. A lender reading a 2020 tax return may see a dip that does not reflect how the business is doing now. Different lenders handle that differently, and we are not going to make a general claim about how banks or private lenders treated it.

What we can say is that clear paperwork helps in any year. If recent tax filings do not tell the whole story, a mortgage broker can explain what different lenders ask for, and a licensed professional can advise on your own filings.

A Fictional Example

This case is fictional and illustrative. It is not a real borrower and not a real file.

Dana is a made-up self-employed contractor who runs a small business. Her income dropped in 2020 and recovered in 2021, so her 2020 tax return looks weaker than her current situation. She wants to buy a property now rather than wait for another tax filing to reflect the recovery.

In this example, a bank may not be a fit while the 2020 return is the most recent filing. Dana might look at a short-term private mortgage, which usually places more weight on the property than on income history, with a plan to move to a conventional lender once her recent returns show the recovery. The plan to exit is the important part: private financing is generally a bridge, and it comes with costs and risks that a borrower should understand before signing.

This example does not show a typical outcome, and it does not predict what any lender would decide. Every application is reviewed on its own facts.

* Fictional example. Names and details are invented for illustration.

The Housing Market in 2020 and 2021

By the end of the period, national housing figures were at records. The Canadian Real Estate Association (CREA) reported 551,392 home sales on Canadian MLS Systems in 2020, a record at that point, and the MLS Home Price Index up 13% year over year in December 2020.7 For 2021, CREA reported 666,995 sales, and a December 2021 MLS Home Price Index up a record 26.6% year over year.8

Fast-moving markets put pressure on buyers to act quickly. Short-term financing, including private mortgages, is one way some borrowers handle that kind of timing, but it should always be weighed against its cost and the plan for repaying or replacing it.

The Qualifying Rate Change of June 2021

Federally regulated lenders must test uninsured mortgage borrowers against a minimum qualifying rate. OSFI set it at the greater of the contract rate plus 2 percentage points or 5.25%, effective June 1, 2021.9 Because the test applies to federally regulated lenders, a borrower who does not pass it at a bank may look at other options. Those options come with their own costs and risks, so it is worth getting advice before choosing one.

Private financing works best with a clear plan to exit, whether that means selling, refinancing or moving to a conventional lender. Keeping tax filings accurate and your paperwork organized makes any of those paths easier.