New Rules For Reverse Mortgages and HELOCs By OSFI
HELOCs or reverse mortgages exceeding 65% of a house's value will be targeted
A new set of guidelines is being implemented by the Office of the Superintendent of Financial Institutions (OSFI), reports CBC News. The new set of rules will apply to shared equity mortgages, reverse mortgages and conventional mortgages paired with revolving credit lines. In this time of a vulnerable housing market, the changes should help lenders and borrowers stay on top of their obligations.
One of the biggest changes will affect the conventional mortgage loans paired with revolving lines of credit, known as HELOCs. Currently, homeowners can dip into them as they see fit, without having to repay on any sort of schedule.
The new regulations will take effect once a loan exceeds 65% of the home's value. Currently, homeowners can borrow up to 80% on such a loan. So, with the new changes, the borrower will be forced to start paying back some of the principal if they go over this limit of 65%.
How will that work?
Well, if the limit is exceeded, the loan "will operate more like a traditional mortgage where the borrower makes principal and interest payments until the [loan gets back below] 65 percent," an official told CBC News.
The new rules will be in effect as of late 2023. However, the consumers are not supposed to see an increase in their monthly payments.
Changes To Shared Equity And Reverse Mortgages
Shared equity mortgages are programs where a third party provides the buyer with cash for a down payment in exchange for an equity stake.
In 2019, the federal government introduced a program for government-backed shared equity loans, and non-profits and community groups have since offered similar programs.
The latest OSFI announcement doesn't entail any new rules, but rather clarifies existing requirements. For example, such products must be equity stakes and not loans. They must be "on an equal footing with the borrower's equity," the official said.
The final changes cover reverse mortgages. Reverse mortgages let homeowners take advantage of the equity in their homes without selling them. These loans have grown in popularity in recent years, mostly because they don't require repayment until the owner decides to sell the property.
As with HELOC, new guidelines limit the amount a homeowner can borrow on a reverse mortgage to 65 percent at origination.
Canada Needs to Fill Housing Supply Gap
CMHC: The Country Needs To Build More So Houses Become Affordable
The Canada Mortgage and Housing Corp published a new report with an analysis of the country's housing stock challenges. Apparently, Canada will face a gap of 3.5 million units in 7 years, if it keeps the current pace of home building.
The agency projects that there will be additional 2.1 million housing units between 2021 and 2030, 19 million homes nationally.
However, that still won't be enough to make housing affordable for all Canadians, says the CMHC. According to them, Canada should have over 22 million units by that time to achieve the goal of affordable housing. That also means that construction should more than double the pace of building.
“Canada’s approach to housing supply needs to be rethought,” the report states. “The evidence has been mounting for many years that the housing supply system is broken in many parts of Canada.”
BC And Ontario Need Biggest Changes
Shocking, eh?
According to the report, two-thirds of the housing gap will be felt in these two provinces, and Quebec has also been mentioned as a place that needs to increase the construction.
However, if Ontario can build the additional 1.85 million homes over the next 7.5 years, the average home price would drop to $499,900 from $871,00 in 2021.
The average home price in B.C. could drop to $679,100 in 2030 from $929,900 if an extra 570,000 units are built.
CMHC points out, however, that the report does not account for government policies that affect demand or the longevity of the work-from-home trend post-pandemic.
CMHC Target Not Achievable, Experts Say
Aiming to build an additional 3.5 million homes in Canada by 2030 is a "massive undertaking," says Mike Moffatt, senior policy director at the Smart Prosperity Institute to Global News.
He also pointed out that besides rising material prices, the construction industry is facing a labour crunch caused by a wave of retirements among metal sheet workers, bricklayers, and electricians.
“We’re having trouble keeping up with those waves of retirements, let alone expanding the sector. So there’s all kinds of bottlenecks here that’s going to make this difficult,” he said.
Canada's Inflation Rate Hit 7.7% in May
Highest Level In 40 years
The annual inflation rate in May was the highest it has been in nearly forty years, says Statistics Canada, mostly because of soaring gas prices.
May's consumer price index rose 7.7 percent compared to a year ago. This is the biggest increase since January 1983 when it gained 8.2 percent. This happened because energy prices rose almost 35 percent compared to a year ago, and gas prices were almost 50% higher than last year.
According to Statistics Canada, crude oil prices increased in May due to the ongoing Ukrainian conflict and increased travel due to COVID-19 restrictions being eased.
Excluding gasoline, the annual inflation rate rose to 6.3% in May from 5.8% in April.
Economic experts predict a 75 bps rate hike in the near future due to soaring inflation
Despite the bank's efforts to control inflation, the rate is rising.
So far this year, the central bank has increased its key interest rate target three times and brought it to 1.5 percent. It has also stated that it is prepared to "act more forcefully" if necessary, which led economists to speculate that it could be raised by three-quarters of a percentage point next month.
“We know inflation is keeping Canadians up at night. It’s keeping us up at night,” the Bank of Canada’s Senior Deputy Governor Carolyn Rogers said in Toronto in reaction to the figures, according to Global News. “We will not rest easy until we get (inflation) back down to target… That’s why we’re raising interest rates, and we’re raising them quite aggressively,” she added.
Everything More Expensive
According to Statistics Canada, food prices rose 9.7 percent from a year ago, matching the increase in April. Nearly everything in the grocery cart costs more.
Edible fats and oils increased by 30.0% compared to a year ago, their largest increase on record. Cooking oils accounted for most of the increase. Fresh vegetable prices rose more than 10%.
In May, the cost of services rose 5.2 percent over a year earlier, up from 4.6 percent in April, as more Canadians travelled and ate out.
Compared with a year ago, traveller accommodation prices increased by 40.2 percent, while restaurant food prices increased by 6.8 percent.
The Full Impact of Higher Rates To Be Felt In The Summer
One good thing is happening to First-time homebuyers though
John Pasalis, president of Toronto-based brokerage Realosophy, says homebuyers won't actually feel the impact of the Bank of Canada's interest rate hike until the summer months. That's when many fixed mortgage rate contracts expire.
“A lot of these mortgage rate holds are going to be expiring in the next month or so, anyone buying in July and August is going to be buying based on these higher interest rates,” he said in a television interview. “We're going to see how that will impact demand and how many buyers are still in the market because a lot have pulled out in the past couple of months.”
Zoocasa's Lauren Haw said there has been a housing stalemate in the past few months. Many buyers and sellers are anticipating what the Bank of Canada will do next.
"The housing market pre-priced this rate hike and most people expected it, but what wasn’t expected was the signal of ongoing uncertainty around what rate decisions will look like in the coming months,” Haw said to Bloomberg.
“I think we are going to continue this stalemate into the summer. There’s a lot of confusion in the market with what a house is worth today and what it would look like once the sale is finalized.”
The Good Thing
One good thing is happening for first-time home buyers if you ask Pasalis. Higher interest rates may scare off some Canadians who are only buying houses as investments.
The Bank of Canada increased its benchmark interest rate by 50 basis points for the second time in a row on Wednesday, bringing it to 1.5 percent. After the rate increase, the biggest Canadian banks, such as TD, CIBC and RBC, also increased their prime borrowing rates by 50 basis points to 3.70 percent, effective June 2.
Canada's housing market is already feeling the impact of the central bank's aggressive rate hikes, with the benchmark price of a home dropping by 0.6% in April from March, marking the first drop in two years.
Canadians Want To Age In Their Homes
So, They're Turning To Reverse Mortgages
Nine out of ten Canadians want to continue living in their home during their retirement years. Reverse mortgages are helping them achieve that.
A recent survey by a reverse mortgage provider, the HomeEquityBank, found that 95% of Canadians aged 45 or more said living in their homes would help them maintain their independence, comfort and dignity as they age.
This is pretty much unchanged from 2020 when a similar survey was conducted by the National Institute of Ageing. The survey found that more than nine out of ten Canadians plan to support themselves for as long as possible.
In the meantime, reverse mortgage debt held by seniors reached a new record of $5.4 billion as of February. That's an increase of over 18%, or $829 million, over the year before, according to data provided by the Office of the Superintendent of Financial Institutions (OSFI).
The Benefits of Reverse Mortgages
Once a homeowner turns 55, it's generally easier to qualify for a reverse mortgage.
Reverse mortgages allow seniors to supplement their retirement income by tapping into the equity in their homes. They can do that either by way of tax-free lump-sum or monthly payments.
These mortgages are designed in a way that doesn't let seniors owe more than what their house is worth. That's because the debt is paid off once the house is either sold, or the homeowner passed away.
Even though reverse mortgages do not require monthly payments, their typically higher interest rates, which currently range between 5% and 7%, can quickly eat away at the proceeds from the sale of the home. The rising prices over the past couple of years, however, have brought substantial improvements to homeowners' equity.
Due to this growing need for cash, Canada's two leading reverse mortgage providers have experienced record growth over the past year.
Rate Hikes To Lead To House Price Fall?
Capital Economics Says We Could Go Back To Pre-Pandemic Levels
An increase in borrowing rates could reduce Canadian housing prices by 10 percent over the next year, according to Capital Economics. That would lead to an even bigger drop in real estate investment.
“When interest rates rise, home sales are usually the first domino to fall and this time is no different. With sales plunging, it is no longer a question of whether house prices will fall, but rather how much will they fall by?” - said Stephen Brown, senior Canada economist at Capital Economics.
According to the latest housing data for April, significant sales declines are underway as higher interest rates discourage some buyers in many major markets across Canada, such as Toronto, Vancouver and Montreal.
In recent months, fixed mortgage rates have surged ahead of higher interest rates, while variable rates - which now account for over half of new mortgages, according to Bank of Montreal data - have also risen with the Bank of Canada's benchmark rate.
Home Prices 25 Percent Lower Than In 2019?
Brown also said he's assuming that home sales will be cut to 25% below the pre-pandemic average from 2019 and added:
“Because house prices have risen so far beyond a level that can be justified by underlying fundamentals, we suspect that, even in the absence of forced selling, prices will fall by 10 percent during this tightening cycle".
According to Brown, if the prices decline by 10 percent Brown, the biggest impact would be the pullback in housing investment. Even though that would cause a slowdown in economic growth, he does not expect it to result in a contraction of GDP.
“But if house prices fell by much more than we expect – which clearly should not be ruled out given their elevated level – a recession would be almost inevitable."
If you ask Brown, the Bank of Canada doesn't really understand how sensitive real estate investors are to interest rates. It is expected, however, for the Bank to stop its tightening cycle once the rate reaches 2.5 percent.
Three Tips For Homeowners Struggling With Paying Off The Mortgage
Dealing With High Interest Rates And Monthly Payments
With interest rates going higher and the real estate market being the most chaotic ever, it might be hard to deal with high interest rates, bigger monthly mortgage amounts, and the inability to downsize because of the home prices.
Very rarely will we hear about the struggles homeowners and mortgage holders go through, the narrative usually leans toward first home buyers and how it's almost impossible to find a decent home for a fair price.
But, what about you? You worked hard and bought your house. Now, with interest rates being higher and inflation on the rise, it's hard to keep up. And you're not alone.
According to the MNP Consumer Debt Index created by Ipsos, 42% of people surveyed said that the rising rates could drive them closer to bankruptcy.
After the Bank of Canada doubled its rate in March, all the big banks and main mortgage lenders have moved their prime rate to 2.70%. This only made things harder for both mortgage holders and home buyers.
The good news is that most homeowners qualified at the stress test rate of 5.25% and many have had their property values increase by a min of 25% so now may be a great time to tap into that equity that can easily be available. It is still cash and it's your cash.
So, how to deal with that and make your wallet smile for a bit? Take a look at these tips:
Extend Your Amortization
And save up more than 30% on monthly payments. Sure, you might have to pay a higher mortgage rate than what you have now, but extending your mortgage period from 15 to 30 years can be of great benefit for you. By lowering your monthly payments, you will have more money to spend on other important things, like bills or insurance.
Rent A Part Of Your Home
If you can, consider renting a part of your home. That way you can generate more cash flow and lower your debt. Check if your municipal rules allow doing that, and of course, do some background checks on the renter.
Add A HELOC
Currently, secured credit lines are available at prime plus .50% percent and it is interest-only to borrow - but you'll need excellent credit, proof of income and enough equity to qualify, while the minimum equity is 20%.
Read More About HELOC Here
You can also refinance to pay out debt and create a large cash account. In many cases your cash flow increases and payments lower. This also puts the money sitting around in your home doing nothing to work instead of creating more debt.
Ontario Housing Getting Too Expensive
Homebuyers Looking At Calgary Real Estate
As Ontario's housing market is getting too hot to handle, potential homebuyers are shifting their focus toward the western provinces, hoping they find something more affordable. And they are.
Residents of the GTA and other hot markets in Ontario are moving to Alberta, specifically Calgary, where the housing market is a bit more bearable, Bloomberg reports.
According to their article, realtors from the province report an unusually high number of inquiries from Ontario. Statistics Canada is here to back that up with their interprovincial migration numbers. For the first time in more than five years, Alberta led the country in interprovincial migration in the last quarter of 2021.
The benchmark price for detached houses in Calgary rose 20% in the last year and was $620,500. In comparison, Toronto's average selling price at the same time was $1.3 million. In Metro Vancouver for the same month was $1.4 million.
Despite the government's efforts in trying to cool down the housing market, the salaries offered in Toronto and Vancouver are not high enough to cover the cost of living, which is why immigrants are starting to look at other options.
Also, Canada's housing affordability crisis occurred simultaneously with Alberta's years-long recession due to depressed oil prices, which could be another reason east Canada is going west. According to the Conference Board of Canada, Alberta is supposed to lead the country's economic growth this year, as well as the next.
Why Is Calgary Appealing?
Not only did Calgary experience growth in its tech scene, but its nature and proximity to the Rockies also seem appealing to homebuyers. The quality of life seems more inviting, and by selling their homes in the Ontario market, retirees can snatch expensive homes surrounded by nature. According to a recent survey from Royal LePage Realty, recreational properties in Alberta are now the most expensive in Canada, outstripping even B.C. Single-family home prices in Canmore, a popular mountain hamlet 80 kilometres west of Calgary, have risen 33% year over year to $1.36 million.
But, since they aren't putting a mortgage on the property, the higher interest rates don't seem to bother the retirees and there's virtually nothing stopping them from taking their money and moving west.
If the pandemic has taught us something, it's the importance of a backyard and walks, not being trapped in an apartment.
Canada Presents 2022 Federal Budget
Here's all The Tax Talk: First Home Buyers Take The Win, Foreign Buyers Banned
The 2022 federal budget was unveiled in Ottawa a few days ago, with the Liberals focusing on putting billions of dollars towards housing, national defence, climate change, and dental care, as well as reconciliation with Indigenous communities.
There is no mention of any large-scale tax changes in this budget, and notably, there has been no mention of capital gains inclusion rates. However, there is a lot of talk about taxes when it comes to buying property, employment and small businesses.
Budget 2022 proposes:
- A Tax-Free First Home Savings Account, which would allow prospective first-time homebuyers to save up to $40, 000. Contributions would be tax-deductible, and withdrawals to purchase a first home would be non-taxable. In 2023, the government intends to work with financial institutions to ensure that a TaxFree First Home Savings Account can be opened. Approximately $725 million in support would be provided by the Tax-Free First Home Savings Account over a five-year period.
- Doubling the First-Time Home Buyers’ Tax Credit amount to $10,000, which would provide up to $1,500 in direct support to home buyers. However, this measure would only apply to homes bought on or after January 1st, 2022.
- Banning foreign investment in Canadian housing. That means that foreign people, as in people who are not citizens or permanent residents of Canada, won't be able to buy property for at least two years.
- Property Flipping To Come With A Cost - this is another way of Canada's effort to save the housing market. Property flipping means selling a property you have held for less than a year. According to the new plan, anyone who does that will be subject to full taxation on their profits.
- Taxing all assignment sales of newly constructed or substantially renovated residential properties fo GST/HST purposes. Effective May 7, 2022.
- Tax reduction for small businesses growing in Canada: phase out access to small business tax rates more gradually, with access to be fully phased out at $50 million, rather than $15 million.
- Employee ownership trusts: Employee ownership trusts are designed to encourage employees to become the owners of their companies, decreasing the amount of privately-owned companies.
- To close the double-deduction loophole by amending the Income Tax Axt to deny a taxpayer the deduction of dividends received when such transactions have taken place.
- Increasing the maximum amount of forgivable Canada Student Loans for doctors and nurses in rural and remote communities, by 50 percent. Up to $30,000 in loan forgiveness for nurses, and up to double the amount for doctors.
- Dental Care for Canadians covered by Health Canada. By 2025, this will be fully implemented for all children under the age of 12, seniors, and persons living with a disability. It will start with under-12-year-olds in 2022, then expand to those under 18 years old and persons living with a disability in 2023. This will be restricted to families with less than $90,000 annually.
- Asking Financial Institutions to Help pay for the recovery - by imposing a temporary Canada Recovery Dividend of 15% on taxable income above a billion dollars for the 2021 tax year. It also proposes to raise the corporate income tax by 1.5% on the taxable income of banking and life insurance groups.
- Preventing Using Foreign Corporations to Avoid Tax - investment income earned and distributed by private corporations is prone to the same taxation as investment income earned and distributed by CCPCs. That means this bill could apply to those who have moved their corporation into a foreign country to pay lower taxes by using foreign shell companies or by moving to an offshore corporation.
- Boosting Charity - a new disbursement quota rates for charities. For investments above a million dollars, the quota will be from 3.5 to 5 percent.
- Minimum Tax For High Earners - the budget proposes the next steps towards the government's examination of a new minimum tax regimen which should go towards ensuring that all wealthier Canadians pay their fair share of tax.
- Correcting Anti-Avoidance Tax Rules that should ensure the correct amount of tax is paid when an interest coupon stripping arrangement is used since they exploit the differences between international tax treaties and allow some to pay less in taxes.
- International Tax Reform - the government is ready to introduce legislation for a digital services tax to ensure that all corporations, including those in the digital sector, pay their fair share of tax on the revenue they earn in Canada.
- Cryptocurrencies in Canada - the government is addressing the digitalization of financial assets while announcing the launching of a financial sector legislative review that will focus on cryptocurrencies and stablecoins.
- Strengthening GAAR (general anti-avoidance rule) - by mending the income tax to provide that the GAAR will apply to transactions affecting tax attributes that have not yet been used to reduce the taxes.
- Bill C-208 Follow-up - setting up a consultation process to hear stakeholder views on how to continue to facilitate genuine intergenerational business transfers while protecting the integrity of tax systems.
- Discontinuing flow-through shares for oil, gas, and coal activities
Switching to zero-emission vehicles - widening the range of eligible vehicles for purchase incentives. - Construction tradespeople and apprentices who temporarily relocate for work will be able to deduct up to $4000 per year for reasonable lodging expenses.
- Blind Bidding: A Home Buyers' Bill of Rights and a national plan to end blind bidding will be developed and implemented over the next year by the Minister of Housing and Diversity and Inclusion. Besides ensuring a legal right to a home inspection, a Home Buyers Bill of Rights could also ensure transparency on the history of price changes on title searches.
- Housing Accelerator Fund: The Budget proposes to provide $4 billion to the Canada Mortgage and Housing Corporation to launch a new Housing Accelerator Fund. The fund will be dedicated to assisting municipalities in building 100,000 new units over the next five years.
Also, according to the federal budget, people wanting to renovate their homes and add accommodation for a senior person can also get a tax credit. It will be called Multigenerational Home Renovation Tax Credit, and it would provide up to $7500 in support for the construction of a suite for a senior or an adult with a disability. This will allow families to claim up to $50 000 if the expenses are eligible, starting in 2023.
As for other types of renovations, you can get up to $10 000 of a tax credit on eligible home renovation expenses through the non-refundable HATC.
First Time Home Buyer Incentive
In order to help more people buy their first home, the federal government introduced the First-Time Home Buyer Incentive, which allows eligible first-time homebuyers to lower their borrowing costs by sharing the cost of buying a home with the government. The government extended the incentive to March 31, 2025. Canada is also researching an option that would let you rent until you own. To help develop that plan, Canada is providing $200 million under the existing Affordable Housing Innovation Fund.
If you need help buying your first home, give us a call.
Home Prices Decline Likely?
Some Say A decline of 24% is possible!
According to a growing number of economic forecasts, Canadian house prices could decline in the near term, with some suggesting declines of as much as 25%.
One such report came from Capital Economics, which described how rising rates pose a major threat to the housing market. However, the housing market won't return to a pre-pandemic mortgage rate.
In the event that the overnight lending rate, which influences the prime rate and, in turn, variable mortgage rates, reaches 2%, house price increases should slow to "little more than zero" next year, said Capital Economics economist Stephen Brown. A higher policy rate would trigger a decline in house prices.
“We shouldn’t assume that the Bank wants to avoid house price declines at any cost. “House prices are a key driver of shelter inflation, so moderate declines would help to get consumer price inflation under control without seriously jeopardizing the economy.”
Although prices are high compared to traditional valuation metrics, Brown said an initial decline could lead to lower house prices and lower expectations.
On the other hand, Oxford Economics sees home prices falling 24% by mid-2024. According to the report by Tony Spillo, the median home price was 19% above the borrowing capacity of the median-income household by late 2021, and it is expected to reach 38% above that by mid-year.
“We believe this will cause the housing market to reach a breaking point and crash under the weight of its own success before year-end,” - he wrote.
Higher borrowing rates are another factor, with the Bank of Canada's policy rate expected to reach at least 2% by 2024. Also, by the middle of this year, Oxford expects average 5-year fixed rates to reach 4.25% and by the end of this decade, 5%.
According to Oxford, the third factor that could help bring house prices to the lower side is the introduction of government policies, such as house-flipping tax, tax on non-resident-owned vacant homes, and a temporary ban on foreign ownership.
Still, even though the house prices could decline by 24%, that would still be 15% higher than before the pandemic.
However, not everyone thinks the decline is about to happen. RBC economics said prices are actually likely to grow by 6.2 percent. The Canadian Real Estate Association also released an updated housing market forecast earlier this month. They predict an annual average sale price of $786,000, an increase of nearly $47,000 over its December forecast, which represents an increase of 14.3% over prices in 2021. Prices are expected to grow at an annual rate of 3.2% in 2023, according to the report.