The mortgage cliff that will see more than two million home loans renewed over the next two years appeared to weigh heavily in the federal government’s fall economic update.
Unveiled on Nov. 21 by Finance Minister Chrystia Freeland, the update revealed a projected budget deficit of $40 billion for 2023-24, slightly less than the $40.1 billion projected in the spring budget, and focused largely on a set of housing affordability measures.
It included a new Canadian mortgage charter that codifies mortgage relief offered by financial institutions to homeowners in financial difficulty, as well as relief for some borrowers from a mortgage stress test if they switch banks to renew, a measure intended to increase competition among lenders and ease the pain of renewals over the next two years in a period of significantly higher interest rates.
The economic update also included a commitment of more than $25 billion in low-cost financing to incentivize the construction of more than 71,000 new rental homes in Canadian cities through the Rental Construction Financing Initiative, and an additional commitment to $13 billion with the Co-National Housing Agency. Investment Fund aimed at building 60,000 new affordable homes and repairing another 240,000.
“Our country needs more housing and we need more housing fast,” Freeland said in the House of Commons as she presented the economic update.
Economists and industry players said the initiatives are a step in the right direction, but only a start, for Canadians grappling with inflation and facing what are expected to be crushing mortgage renewals at higher interest rates.
“It appears that the federal government is aware of the pressures Canadians feel around being able to afford to buy a home, whether for the first time, or a step up, or even downsizing, and those currently in homes and concerned about renovations,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd.
“It’s important to see the government recognize that Canadians are feeling some pressure and stress regarding the speed at which interest rates have increased and the spread they could be paying when renewing.”
Beyond incentives to build thousands more rental units, Freeland announced a crackdown on short-term rentals aimed at freeing up housing availability for long-term renters and buyers. Rental properties through companies such as Airbnb Inc. and seeking to deduct expenses for short-term rental properties in regions where they are prohibited or do not comply with government registration will no longer be permitted.
Yolevski said if the tax change puts condos in cities like Toronto on the block or makes them available for long-term rentals, it would add needed housing stock. However, he said some of the properties likely to be affected will be recreational and therefore will not add much supply in urban areas where it is needed.
John Oakey, vice-president of CPA Canada’s tax division, questioned the use of taxes when there is no evidence they help.
“We are concerned that this measure could create inequities in the tax system without a clear sense that it will significantly improve housing supply in Canada,” Oakey said in a statement.
However, housing advocates praised the federal government’s crackdown, citing a McGill University study that said platforms like Airbnb have removed tens of thousands of units from Canada’s housing market.
“Short-term commercial rentals are exacerbating Canada’s affordability crisis by driving up rents and robbing renter households of much-needed units,” said Annie Hodgins, executive director of the Canadian Center for Housing Rights.
“Governments across Canada must work together to implement regulations that stabilize rent increases and mitigate the impact of short-term commercial rentals on the housing affordability crisis.”
Housing supply has been recognized as one of the most important factors in skyrocketing housing prices, which caused the median home price to surpass $1 million in some cities. But creating enough housing to meet demand will require action at the federal, provincial and municipal levels.
To restore affordability, the Canada Mortgage and Housing Corporation (CMHC) says an additional 3.5 million units are needed on top of the 18.2 million projected to be built by 2030, with 60 per cent of the shortfall occurring in Ontario and British Columbia, where the pace could not be kept up. with the demand it is felt more acutely.
CMHC has also highlighted the mortgage cliff, with estimates that 2.2 million mortgages will need to be renewed in 2024 and 2025 (with loans totaling $675 billion), or about 45 percent of all mortgages pending in Canada. Although rates are not as high as they have been in Canadian history, today’s mortgage holders have faced the largest and fastest rise in interest rates in more than four decades, CMHC said in a Sept. 9 report. of November.
Only a portion of the mortgages pending renewal are insured and, therefore, would be entitled to relief in the economic update.
Still, Chris Allard, an Ottawa-based mortgage broker, said eliminating the stress test for some homeowners who want to compare prices between financial institutions when renewing their mortgages is a positive step because the stress test required at the new institution would force them to qualify at a much higher cost. higher monthly mortgage rate than they had at the current financial institution.
“Borrowers always feared they would have to sign up for a less favorable rate simply because they didn’t qualify to go elsewhere,” he said, noting that it was previously possible to transfer a mortgage from one lender to another. another without a stress test but only for those who had mortgage insurance in force before October 2016.
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Stress test relief for some borrowers was incorporated into the new Canadian mortgage charter that codifies mortgage relief, including temporary extensions of repayment periods for at-risk mortgage holders and waiving fees and costs for such relief.
Under the statute, lenders will have to contact homeowners four to six months before their mortgage renewal to inform them of their renewal options, including the possibility of making balloon payments to avoid negative amortization or selling. your primary residence without prepayment penalties. Additionally, banks will not be able to charge “interest on interest” if the borrower is temporarily in a negative amortization period, meaning they are covering only the interest without paying any principal.
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