MONTREAL — If a thought bubble were floating these days above Damien Charbonneau’s head, there’s a better-than-even chance it would read: Rate increases? What rate increases?

Like everyone, he has watched as mortgage rates went from business-as-usual bumps to an abrupt, hockey-stick spike amid the Bank of Canada’s attempts to curb inflation. Yet Charbonneau, co-founder and COO of the Montreal-based fintech Nesto, seems unworried—even though the increases are intended to tamp down demand for mortgages, Nesto’s bread and butter.

“We keep growing month over month over month, despite a shrinking purchase market,” Charbonneau told The Logic. “So for us, it’s still pedal to the metal. We’ve got to staff our team, so that next mortgage season, we’re ready.” The reason Nesto is expanding amid higher interest rates and a resulting market downturn? “We’re well capitalized,” Charbonneau said. The proof, he added, is in Nesto’s job board. The company currently has 14 positions it hopes to add to its 250-employee roster. 

In theory, big and small lenders alike suffer from increased interest rates. “The formula applies to any lender: when rates go up, the cost of capital increases,” said Gary Schwartz, president of the Canadian Lenders Association. In the past, traditional banks have ridden out these periods—and resulting economic downturns—by drawing on their vast capital resources and diverse revenue streams that less established players lack. But this time around, some Canadian fintech firms have their own secret weapon: gobs of venture capital money.

Backed by Portage, Power Corporation’s VC arm, the company has raised $84.25 million, including a $76-million Series B round in June 2021 that was led by tech entrepreneurs Michael Rowell and Michael Paulus. The online lender uses AI to screen the mortgage market to offer lower rates than traditional banks and brokers. 

Nesto isn’t the Canadian fintech with a nest egg. Toronto-based Pine announced a $27-million in seed and Series A funding in late May 2022, just as the handle of the hockey stick was taking form. Calgary’s Neo, meanwhile, has raised $274.29 million since its founding in 2019, according to PitchBook data, including a $185-million Series C round in May, earning it unicorn status a mere two months before the Bank of Canada’s historic one percentage-point hike. 

“These lenders will use this capital to invest in their financial technology, which is where they, in great part, have an advantage over banks,” said Schwartz.

To be sure, companies like Nesto, Pine and Neo are among the lucky ones. Global fintech had a 33 per cent quarter-over-quarter tumble in the second quarter of 2022, according to a CB Insights report. The downfall of companies like the online-payments startup Fast and the New Jersey-based crypto-loan outfit Celsius, whose backing includes a reported $150 million from Quebec pension fund manager Caisse de dépôt et placement du Québec, underscores the upheaval in the fintech space.

Though the higher interest rates have pushed down the number of new mortgages in the industry in general, Charbonneau said, they have also raised awareness among customers of the savings Nesto is able to provide. (The company currently offers a 4.54 per cent, five-year fixed-term loan; by comparison, RBC’s current rate for the same loan is 5.54 per cent.)

“For us, the increase in mortgage rate is not sucking the life out of the market. There’s still purchases happening; there’s still renewal happening,” said Charbonneau. “It’s just we see a lot more intent from clients.” He pointed to the pivotal period when the Bank of Canada increased its rates by a full point: “Those two days—the day leading to it and the day of—we saw double site visits. These were the two highest site-visit days for us since the inception of Nesto.”

In June, the company introduced a 150-day rate hold, allowing customers to lock in as a hedge against future increases. The hold also serves as an incentive for customers to move their existing mortgages to Nesto from other providers, said Charbonneau; if their mortgage is set to expire within 150 days, they know that the rate on offer will still be available, regardless of subsequent interest hikes. Charbonneau added that both renewal and new-mortgage numbers are on the rise at Nesto, and that the share of renewals in the company’s mix of transactions remains constant—though he declined to say whether Nesto will have to resort to further funding should the downturn spiral into a recession. 

Suffice to say, his sanguine outlook contrasts with that of smaller established mortgage players in the field. “Mortgage brokers are just starting to starve now, because there’s a long lag of final commissions being paid to both realtors and mortgage brokers,” said Ron Butler, president of Toronto-based broker Butler Mortgage. “We’re still getting paid on something that was initiated in March and April. But it’s over now. It’s gone. All gone. 

“I refer to this as the valley of death,” Butler added ruefully. “We’ve reduced our headcount 38 per cent since March.”