Federal budget: Will it provide any relief for Canadian homeowners and buyers?
Fergal McAlinden
CMP
The announcement contained protections for mortgage holders and updates on the tax-free first-home savings account
Amid a flurry of new policies in Tuesday’s federal budget were a couple of announcements that may have caused mortgage professionals to sit up and take note.
One was the promise of a new code of conduct to help existing mortgage borrowers, a set of guidelines that would protect Canadians who are facing “exceptional circumstances” related to meeting their mortgage payments.
That measure would require lenders to provide Canadians with access to appropriate relief options including extended amortizations, amended payment schedules, or the authorization of lump-sum payments, with amortization extension periods past the current 25-year limit also on the table.
Another noteworthy takeaway from the budget was the launch of the tax-free first home savings account, aimed at improving the affordability crisis facing new entrants to Canada’s mortgage market.
Having first announced the scheme in last year’s budget, the government revealed that it would be available to borrowers as of April 1, giving them the option to save up to $40,000 on a tax-free basis to put towards a down payment on their home.
Tuesday’s budget billed the scheme as a “tax-free in; tax-free out” plan that would feature tax-deductible contributions and non-taxable withdrawals to purchase a first home.
The measure for new homebuyers was described by Alexandre Laurin (pictured top), director of research at the C.D. Howe Institute thinktank, as a “very generous tax shelter” without an equivalent in Canada.
“It’s money that will never be taxed, and that’s the only shelter in Canada that has this feature,” he told Canadian Mortgage Professional. “It’s the only one where you don’t pay taxes going in, but you also don’t pay taxes going out.
“The TFSA [tax-free savings account], you pay taxes going in – it’s after-tax money, but not this one. And if you invest in housing, your principal residence is not going to be taxed either. So it is a very generous tax incentive where you can earn income completely untaxed.”
How fiscally prudent was the budget?
Economic observers were watching closely to see how the Liberal administration and federal finance minister Chrystia Freeland would achieve a tricky balance between addressing the overall affordability crisis facing Canadians and demonstrating fiscal prudence in an uncertain economic climate.
Laurin said the government had failed to strike that sweet spot, describing the budget as a plan whose theme was “borrowing to spend again and again and again.”
According to the Institute’s research, every successive budget and fiscal update since 2019 has featured additional spending, he noted, with higher borrowing factored in until 2024-25 despite the fact that COVID relief measures are expected to have been phased out completely by then.
“It’s really a staggering amount of new spending since 2019, just before the pandemic,” he said. “Our view hasn’t changed on this: it’s not prudent [on a macro perspective].
“It’s also not fair to future generations. It’s not fair because ultimately, there are deficits all the way through to 2027-28, the end of the projection period.”
Some of that spending will be recouped through plans to raise billions of dollars from banks and insurance companies through tax rule changes for dividends obtained from Canadian firms.
New protections “good news” for mortgage holders
Dominion Lending Centres (DLC) economist Sherry Cooper said the budget contained little in the way of measures to improve housing affordability for Canadians, although she highlighted the code of conduct as one to watch.
“We will see what OSFI [the Office of the Superintendent of Financial Institutions, Canada’s banking regulator] has to say about this, as the details are always of paramount importance,” she said.
Cooper also emphasized the budget’s reduction of the legal limit on interest rates, with the government intending to lower the criminal rate of interest from 47% to 35%.
Overall, the government’s recognition of the challenges facing Canadians on variable-rate mortgages who have seen their payments and interest rates skyrocket over the last year is good news, Cooper said.
“If the banks can extend remaining amortizations when borrowers renew, the pressure on their pocketbooks will be markedly lower,” she said.
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