Since its founding in 2018, Montreal-based Nesto has grown rapidly, with its most recent boost coming in June with the acquisition of CMLS Financial Ltd., the country’s third-largest mortgage lender.Nathan Denette/The Canadian Press
Online lender Nesto Inc. just acquired a much larger provider of residential and commercial mortgage loans and now has its eye on a larger part of the mortgage market.
Many homeowners will soon be renewing their low-interest pandemic-era mortgages at significantly higher interest rates, and Nesto believes this is an opportunity for the company to expand its portfolio of home loans.
“We call it the big renewal,” Nestos CEO Malik Yacoubi said in an interview. “There will be a big renewal wave that could open up some opportunities for us to gain market share.”
Since its founding in 2018, Montreal-based Nesto has grown rapidly, with its most recent boost coming in June with the acquisition of CMLS Financial Ltd., the country’s third-largest mortgage lender.
The deal elevated Nesto to the league of non-bank lenders and the commercial mortgage sector. Nesto-CMLS has $60 billion in outstanding mortgages, up from $10 billion before the deal. The combined company has 1,000 employees in 10 offices across the country, compared to just 300 at Nesto.
The acquisition was backed by Nesto’s major investors, including Sagard-backed Diagram Ventures, as well as Portage and Power Corp’s Canadian subsidiary IGM Financial.
Yacoubi wants to expand his company’s reach and reach even more people who want to buy mortgage loans. Nesto mortgage loans are already available through the company’s website as well as through a large network of brokers.
Homeowners and buyers who took out a mortgage during the pandemic were able to get loans with interest rates below 2 percent. Many of these low-cost mortgages have five-year terms and are up for renewal in 2025 and 2026.
With mortgage rates currently hovering around 5 percent, these homeowners will face significantly higher payments and will look for the cheapest options.
“They are more inclined to shop and from our point of view we see this as an opportunity to stimulate the interest of the market,” said Mr Yacoubi.
About 2.2 million mortgages, or about 45 percent of all outstanding mortgages in the country, will face interest rate hikes this year and next, according to Canada Mortgage and Housing Corp. It estimates that average monthly homeowner payments could rise by 30 to 40 percent.
Since borrowing costs began rising in 2022, Canada’s big six banks have been gaining market share from other lenders. At the end of last year, they had 64.8 percent of new mortgages or mortgage originations. That’s up from 53 percent at the end of 2022, according to CMHC data. (Originations include extensions and refinances.)
By comparison, nonbank mortgage lenders made 8.8 percent of mortgage loans at the end of last year, compared with 10.3 percent at the end of 2022, CMHC data show. Credit unions, mortgage investment companies, trusts and other chartered banks make up the rest of the loans.
The higher interest rates in 2023 made it much harder for borrowers to switch lenders if they needed to renew their loan this year. That’s because borrowers without an insured mortgage must retake the federal mortgage stress test if they switch lenders. If borrowers renew their loan with the same bank, they are not subject to the stricter eligibility rules.
However, mortgages have become slightly cheaper after the Bank of Canada cut interest rates, meaning it may be easier for borrowers to switch lenders.
And that is exactly what Nesto hopes to capitalize on.
“I guess everyone wants to be number one at some point,” said Yacoubi. “That means we’re going to be ambitious.”
With $60 billion in mortgage volume under management, Nesto-CMLS is less than half the size of the country’s two largest non-bank mortgage lenders, First National Financial Corp. and MCAP Group.
