Homeowners fretting about paying more on their mortgages at renewal could soon have more power to shop around for a better rate, thanks to a package of housing affordability measures proposed in the Liberals’ fall economic statement.
Finance Minister Chrystia Freeland tabled the Liberals’ fiscal update in the House of Commons on Tuesday. The spending document came with a broad focus on affordability issues, and specifically on housing costs.
One of the groups the Liberals targeted for relief are Canadians with mortgages, many of who are gearing up to face higher monthly payments as they renew their loans in the modern higher interest rate environment.
Ottawa is proposing to introduce a Canadian Mortgage Charter that will set expectations for how lenders interact with homeowners throughout the mortgage process.
“Our goal is to help Canadians through an incredibly challenging time by making sure Canadians have the support they need to afford their homes when renewing at a time of higher interest rates,” Freeland said in the House of Commons Tuesday.
One of the proposals would see homeowners with an insured mortgage up for renewal not have to requalify at the minimum qualifying rate — colloquially called the stress test — if they’re switching lenders at the end of their term.
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The stress test sees Canadians qualify for a mortgage at rates higher than what they’ll be paying as a buffer against interest rate hikes. Applicants are stress tested to see if they could make payments at rates of 5.25 per cent or the contract rate on offer plus two percentage points — whichever is higher.
Those with mortgages up for renewal don’t have to pass the stress test to re-up with their existing lender — they only have to clear that bar if they’re looking to change to another federally regulated institution.
After the Bank of Canada rapidly raised its interest rates over the past year and a half, the need to requalify and pass the stress test has boxed many Canadians out of the chance to shop around for better rates.
That’s given homeowners’ existing lenders the upper hand when negotiating a new mortgage rate at renewal, says Sahir Khan, executive vice-president of the Institute of Fiscal Studies and Democracy at the University of Ottawa.
But Khan tells Global News that removing the stress test could level the playing field and push lenders to fight harder to hold a homeowners’ mortgage. He compares it to using a mortgage broker before buying a home to shop around and find the best possible rate.
“Borrowers, now, benefit from a more competitive market,” he says.
The Canadian Mortgage Charter is expected to be voluntary for lenders. Freeland told reporters in lock-up before tabling the fall economic statement that having the proposed charter in a government document sends “a very significant message” to Canadians and financial institutions.
Other measures in the proposed charter echo a guideline implemented by the Financial Consumer Agency of Canada in July. These include temporarily stretching amortizations for homeowners at risk of defaulting on their mortgage and waiving fees that would otherwise have been charged for relief measures.
Khan says that measures in the charter to help Canadians secure lower rates or just reduce their payments with changes to amortization can help to avoid the “really big shock” for homeowners who secured cheap financing during the pandemic but are now set for renewal.
Liberals trying to boost housing ‘supply, supply, supply’
Ottawa’s ability to spend heading into the fall economic statement has been constrained by a slowing economy shrinking the federal coffers. The governor of the Bank of Canada has also warned governments at all levels not to ramp up spending plans, lest they risk refuelling inflation.
But the Liberals had a series of initiatives in the update aimed at boosting the supply of homes in the country as Canadians continued to face high cost of hosing.
“Housing is an urgent concern of Canadians. Housing is so connected to affordability for Canadians. And that is why our focus is supply, supply, supply,” Freeland told reporters in lock-up.
These include plans to put an additional $1 billion into an affordable housing fund and another $15 billion top-up to Canada’s existing $25-billion program for low-cost rental construction financing. Spending here would begin in 2025.
The Liberals are also hoping to free-up some existing housing supply through a crackdown on short-term rental (STR) platforms that are skirting existing rules at the municipal or provincial level.
The fall economic statement proposes taxation changes that would deny income tax deductions for STR operators in markets where short-term rentals are banned, or, where those hosts are flaunting the rules of their jurisdictions. Ottawa would also put aside $50 million starting next year to help cities enforce their STR regulations.
British Columbia recently announced plans to limit STR units to a host’s primary residence and one secondary suite, and trumped up fines for rule-breakers. The Conference Board of Canada argued in a study in October that Airbnb’s presence in Canadian cities wasn’t large enough to make a meaningful impact on housing affordability nationally.
Khan says that the tax implications for STR operators are “significant,” as removing the ability to claim expenses on their income taxes can completely change the business case for hosts.
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The Liberals estimate that, as of 2020, nearly 19,000 units were being rented out on platforms like Airbnb and Vrbo in Montreal, Toronto and Vancouver — cities that all have their own local rules for the STR space.
If these hosts were to sell or rent a unit on the long-term market, Khan says it would be a “contribution” to the national housing gap. But he adds it pales in comparison to the 3.5 million homes the Canada Mortgage and Housing Corp. says the country will need to add to restore affordability.
Many of the Liberals’ efforts to spur housing construction, including previously announced plans to boost low-cost financing for builders through the Canada Mortgage Bonds and waiving GST on purpose-built rentals, come with a long lead time, Khan notes. Even if federal policies do encourage more building, he says developers will have to generate business plans and apply for zoning and other approvals from municipalities before any shovels in are put in the ground.
Housing policies announced in the fall economic statement are a “downpayment” on the millions of homes the Liberals’ have pledged to get built, Khan says.
“It takes time to build. There’s a cycle,” he says.
But Khan also says the Liberals are limited in what they can achieve on the housing front, with other layers of government holding approvals needed to get more density in Canadian cities. While Ottawa may have put funding on the table to boost housing supply, he says cities and provinces will have to follow suit.
“The federal government has the resources; the provinces have the authority; the municipalities have the problem,” Khan says. “The reality is, it takes coordination of all three to get things done.”
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