The mortgage cliff that will see more than two million home loans up for renewal over the next two years appeared to weigh heavily in the federal government’s fall economic update.
Unveiled Nov. 21 by finance minister Chrystia Freeland, the update revealed a projected budget deficit of $40 billion for 2023-24, down a shade from the $40.1 billion projected in the spring budget, and was heavily focused on a suite of housing affordability measures.
It included a new Canadian mortgage charter that codifies mortgage relief offered by financial institutions to financially strapped homeowners, as well as relief for some borrowers from a mortgage stress test if they switch banks to renew, a move intended to increase competition among lenders and ease the pain of renewals over the next couple of years in a period of significantly higher interest rates.
The economic update also included a commitment of more than $25 billion in low-cost financial to incentivize the build of more than 71,000 new rental homes in Canadian cities through the Rental Construction Financing Initiative, and a further $13 billion commitment to the National Housing Co-Investment Fund aimed at building 60,000 new affordable homes and repairing 240,000 others.
“Our country needs more homes and we need more of them fast,” Freeland said in the House of Commons as she delivered the economic update.
Economists and industry players said the initiatives are a step in the right direction — but only a start — for Canadians dealing 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 that Canadians are feeling around either being able to afford to buy a home, whether that’s a first time home, or a step up, or even a downsize, and those that are currently in homes and worried about renewals,” said Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd.
“It’s important to see that the government is recognizing that Canadians are feeling some pressure and stress in regard to the speed at which interest rates increased and the differential they may be paying upon renewal.”
Beyond the incentives to build thousands more rental units, Freeland announced a crackdown on short-term rentals aimed at freeing up availability of housing for longer-term renters and buyers. Those renting out properties through companies such as Airbnb Inc. and seeking to deduct expenses for short-term rental properties in regions where they are prohibited or not in compliance with government registration will no longer be allowed.
Yolevski said if the tax change puts condominiums in cities such as Toronto on the block or makes them available for longer-term rental, it would add needed housing stock. However, she said some of the properties likely to be affected will be recreational and therefore won’t add much supply in urban areas where it’s needed.
John Oakey, vice-president of the tax division at CPA Canada, questioned using taxation when there isn’t proof it will help.
“We are concerned this measure could create inequities in the tax system with no clear sense that it will meaningfully improve Canada’s housing supply,” Oakey said in a statement.
However, housing advocates praised the federal government crackdown, citing a study from McGill University that said platforms such as Airbnb have removed tens of thousands of units from Canada’s housing market.
“Commercial short-term rentals are exacerbating Canada’s affordability crisis by driving up rents and taking sorely needed units away from renter households,” said Annie Hodgins, executive director of the Canadian Centre for Housing Rights.
“Governments across Canada must work together to implement regulations to stabilize rent increases and mitigate the impact of commercial short-term rentals on the housing affordability crisis.”
Housing supply has been acknowledged as one of the biggest factors in skyrocketing housing prices that pushed the average price of a home over $1 million in some cities. But creating enough housing to meeting demand will require steps to be taken federally, provincially and in municipalities.
To restore affordability, The Canada Mortgage and Housing Corp. (CMHC) says 3.5 million additional units are needed beyond the 18.2 million projected to be built by 2030, with 60 per cent of the shortfall in Ontario and British Columbia where a failure to keep up with demand is felt most acutely.
CMHC has also highlighted the mortgage cliff, with estimates that 2.2 million mortgages will have to be renewed in 2024 and 2025 — with loans totalling $675 billion — or about 45 per cent of all outstanding mortgages in Canada. Though rates aren’t as high as they have been in Canadian history, today’s mortgage holders have faced the largest and fastest increase in interest rates in more than four decades, CMHC said in a Nov. 9 report.
Only a portion of the mortgages up for renewal are insured and would therefore be entitled to the relief in the economic update.
Still, Ottawa-based mortgage broker Chris Allard said removing the stress test for some homeowners who wish to shop around 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 monthly mortgage rate than they did at the current financial institution.
“There was always fear from borrowers that they (would) have to sign at a less favourable rate simply because they don’t qualify to go somewhere else,” he said, noting that it was previously possible to transfer a mortgage from one lender to another with no stress test but only for those who had mortgage insurance in place prior to October 2016.
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The relief from the stress test for some borrowers was built into the new Canadian mortgage charter that codifies mortgage relief, including temporary extensions of amortization periods for mortgage holders at risk, and the waiving of fees and costs for such relief.
Under the charter, lenders will have to contact homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options, including the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties. In addition, the banks won’t be able to charge “interest on interest” if the borrower is temporarily in a period of negative amortization, which means they are covering just the interest without paying down any principal.
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