There was little fanfare earlier this year as financial institutions started making the new First Home Savings Account (FHSA) available to their clients.

But now that the product is better understood, it’s being hailed by some as “the greatest deal in the history of Canadian savings.”

At least that’s according to David Chilton, the bestselling author of The Wealthy Barber, who recently published an “emergency” TikTok video on the new savings account, saying young adults struggling to save for their first home “need to know about this.”

The FHSA was launched earlier this year by the federal government as a new vehicle to help prospective first-time buyers save for their home purchase.

It’s unique in that it combines the benefits of a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA). Like an RRSP, your contributions are tax deductible for the year in which you make them, and like a TFSA, any income, capital gains and dividends earned in the account are tax-free.

“As long as you’re taking the money out for the purposes of purchasing an eligible home, there are no tax consequences,” David Gyurtis, regional vice president at Mortgage Alliance and financial advisor at Keybase Financial Group, told CMT.

Why you should open a FHSA before the end of the year

The FHSA allows first-time homebuyers to contribute up to $8,000 per year up to a lifetime limit of $40,000. Any unused contribution room in a calendar year will be carried over to the following year.

For this reason, many financial advisors are suggesting that people open a FHSA account this year in order to accumulate the additional contribution room.

For those who are undecided about whether they want to purchase a home, Gyurtis advises that people at least open their FHSA to start accumulating the contribution room, even if they still plan to put most of their investments into a TFSA.

“I tell people at least get it open this year,” says Gyurtis. “If I put in $5, I will get that and whatever I don’t use this year carries over to the following year.”

Then, if they decide they do want to purchase a home later on, they can transfer the money into the room they accumulated in the FHSA and get a tax receipt to deduct from their income tax.

“If you’re really on the fence, put the bulk of your savings into your TFSA, then as soon as you’re ready, you can flip it over to the FHSA,” says Gyurtis.

If you don’t end up purchasing a home, the amount in your FHSA can be transferred to your RRSP tax-free.

“The nice thing is any money that’s in that plan—let’s say you don’t buy a property—you can actually transfer that to your RRSP with no tax consequences,” Gyurtis said. “It won’t even affect your contribution room into your RRSP.”

Alternatively, if you want to invest in an FHSA but don’t have the cash, Gyurtis says that people could consider transferring the money from their TFSA into an FHSA, and then put the money they save on taxes via a tax refund back into a TFSA.

In any case, Gyurtis suggests, “open up your FHSA so you’re getting the benefit of accumulating the contribution room.”

How does the FHSA compare to a TFSA or a home buyers’ plan?

For those saving for a down payment on a home, they may be comparing the FHSA to other investment tools like the TFSA or the Home Buyers’ Plan (HBP).

The TFSA is a savings account for Canadians that lets their money grow tax-free. This money can then be taken out at any time and used in any way, including as a down payment on a property.

While the TFSA doesn’t offer the income tax deductions of a FHSA, it does offer more financial flexibility since it doesn’t require the money to be put towards a down payment.

Another alternative to the FHSA is the HBP, which allows Canadians to take up to $35,000 out of their RRSP to put towards a down payment on a home. This money then has to be repaid in the following 15 years starting two years after you made the withdrawal.

But unlike the HBP, the main benefit of the FHSA is that it doesn’t require any repayments. Importantly, Gyurtis says that the $40,000 lifetime contribution limit of the FHSA and $35,000 limit of the HBP can be combined so that Canadians can use up to $75,000 in investments to save for their down payment.

How has the FHSA been helping Canadians with home ownership?

The FHSA was created by the federal government with the intention of helping more first-time home buyers afford a property.

Since its launch in April, many first-time buyers have expressed interest in the FHSA with up to 52% of potential first-time home buyers saying they are likely to use the new savings account, according to a survey from BMO.

So far, more than 250,000 Canadians have opened a FHSA at one of over 20 financial institutions who are now offering them, according to the federal government’s Fall Economic Statement.

Is the FHSA the answer to affordability challenges?

However, Gyurtis has concerns about whether the FHSA is the most effective method for helping first-time home buyers get into a home.

“The whole issue is whether Canadians have enough money to put away,” he says. “What we were really looking for is something to help [first-time buyers] qualify for a property more easily, because right now, that’s the big challenge for first time homebuyers.”

He believes that one of the most effective ways of making home ownership more attainable to first-time buyers would be to offer longer amortization periods so buyers are able to spread out their mortgage payments over a longer period of time, making qualifying easier.

“We need to make it so that young Canadians feel that homeownership is attainable,” he says.

Frequently asked questions about the FHSA

For those interested in opening a FHSA, here are some key details to keep in mind.

Who can open a FHSA?

• Anyone who is at least 18 years of age, not more than 71 years old, a resident of Canada, and a first-time homebuyer.

Who qualifies as a first-time homebuyer?

• For the purposes of opening a FHSA account, you are considered a first-time homebuyer if you did not, at any time in the current calendar year before the account is opened or at any time in the preceding four calendar years, live in a qualifying home as your principal place of residence that you owned or jointly owned, or that your spouse or common-law partner owned or jointly owned.
• For the purposes of a qualifying withdrawal, you are considered a first-time homebuyer if you did not, at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or at any time in the preceding four calendar years, live in a qualifying home as your principal place of residence that you owned or jointly owned.

How can you open a FHSA?

• You must contact a FHSA issuer, such as a bank credit union, a trust or insurance company. There are currently more than 20 financial institutions that offer FHSA accounts, including all of the Big 6 banks.

What do you need to open your FHSA?

• You will need to provide your financial institution with:
  • your social insurance number
  • your date of birth
  • any supporting documents needed to certify you are a qualifying individual

When must you close your FHSA?

• Your maximum participation period begins when you open your first FHSA and ends on December 31 of the year in which the earliest of the following events occur:
  • the 15th anniversary of opening your first FHSA
  • you turn 71 years of age
  • the year following your first qualifying withdrawal from your FHSA

This article was written for Canadian Mortgage Trends by:

Canada’s banking regulator confirmed it will leave the mortgage stress test for uninsured mortgages unchanged.

In its annual review, the Office of the Superintendent of Financial Institutions (OSFI) said the minimum qualifying rate (MQR) used by federally regulated lenders will remain the greater of 5.25% or the mortgage contract rate plus 200 basis points (2%).

OSFI oversees the mortgage stress test for uninsured mortgages—generally those with a down payment of more than 20%—while the Department of Finance is responsible for the stress test applied to insured mortgages, or those typically with a down payment of less than 20%.

OSFI said it is confident the current stress test will result in lower residential mortgage default rates than would otherwise be the case if lenders did not apply the MQR when originating mortgages for homeowners.

“The minimum qualifying rate for uninsured mortgages has produced a more resilient residential mortgage financing system characterized by low default and delinquency rates,” said OSFI head Peter Routledge. “Holding the MQR at its current rate helps ensure that lenders and borrowers effectively manage the risks associated with residential mortgages.”

What is the minimum qualifying rate?

OSFI’s stress test was first introduced in 2018 as part of its updated B-20 guidelines, which govern mortgage underwriting practices and procedures.

The stress test must be used by federally regulated lenders to qualify new uninsured mortgage borrowers and those wanting to switch lenders using the higher of their contracted mortgage rate plus 200 bps or 5.25%, whichever is higher. This is known as the minimum qualifying rate, or MQR. Insured mortgages don’t need to be re-stress tested when switching to a new lender, OSFI revealed in October.

Most mortgage rates currently available from the big banks and other national lenders are currently higher than 5.25%, meaning borrowers must prove they can afford payments based on a qualifying rate of 7.25% or more.

But with some mortgage rates now falling near or even below 5%, the minimum qualification rate of 5.25% could once again become more important.nesto to take on Canada Life’s mortgage clients

After announcing its exit from the residential mortgage market in 2022, Canada Life has reached an agreement with nesto to take on the servicing of its existing portfolio.

Montreal-based nesto, which launched in 2018, is a leading digital mortgage company and will begin the servicing and administration of Canada Life’s mortgage portfolio starting in January. As part of the agreement, nesto will also be responsible for Canada Life mortgages at maturity.

“We are very excited about nesto’s award winning customer service platform which was an important factor in our decision to choose nesto,” said Steve Fiorelli, SVP, Wealth Solutions, Canada Life. “We wanted to ensure that our mortgage customers have a best-in-class partner passionate about offering great service for one of their most important investments.”

The partnership will bring nesto’s mortgages under administration to more than $10 billion.

National mortgage arrears rate ticks up

The national average mortgage arrears rate ticked up in September, though it continues to remain just off its all-time low.

After seven straight months of no change, the national arrears rate rose to 0.16% from 0.15%. That works out to 8,140 mortgages out of a total of 5.07 million, according to data from the Canadian Bankers Association.

The arrears rate tracks mortgages that are behind payments by three months or more. While this has ticked up from the all-time low of 0.14% reached last year, it is well below the highs seen during the pandemic, which saw a peak of 0.27% in June 2020.

The arrears rate is highest in Saskatchewan (0.58%), Alberta (0.33%) and Manitoba (0.28%), and is lowest in British Columbia (0.13%), Quebec (0.13%) and Ontario (0.10%).

Average mortgage balance rose 3.9% in Q3

The average outstanding mortgage balance rose to $356,848, according to data from TransUnion. That’s up 3.9% compared to a year earlier.

The agency also reported a dramatic slowdown in mortgage originations in the first half of the year, which were down 27% compared to the active mortgage market in early 2022.

In its own measure of 90+ day mortgage delinquency rates, TransUnion reported a 2-basis-point rise in Q3 to 0.20%. Personal loans saw the largest rise in delinquencies, rising 16 bps to 1.27%, followed by auto loan delinquencies, which were up 12 bps year-over-year to 0.88%.

Ontario’s new blind bidding rules come into force

New rules impacting real estate transactions in Ontario took effect December 1, which are meant to provide more choice and transparency for buyers and sellers.

As part of an update to Ontario’s realtor legislation, the Trust in Real Estate Services Act (TRESA), sellers now have the option to use an open bidding process, which would allow them to disclose submitted bid prices to potential buyers—something that was banned previously.

While the federal Liberals promised to end blind bidding as part of their Home Buyers’ Bill of Rights unveiled in 2022, there remains no national ban, and the new disclosure rules in Ontario are only voluntary.

This article was written for Canadian Mortgage Trends by:

Alternative lender Equitable Bank revealed today that a majority of its residential mortgage clients have already renewed at higher interest rates and have largely absorbed the increases.

In the bank’s fourth-quarter earnings call, President and CEO Andrew Moor said over 80% of its uninsured single-family mortgage customers have either originated or renewed their loans at today’s higher interest rates. As of year-end, its alternative mortgage clients had an average rate of 5.99%.

Moore said he is encouraged that the “vast majority of our customers are able to absorb this increase.”

“I have a lot of empathy for our customers here. I think lots of people wouldn’t have expected interest rates to rise as fast as they have,” he said during the bank’s earnings call.

“Most people, because the employment situation is still fairly good, are able to accommodate this shock to the mortgage payment,” he continued.

However, like other banks and mortgage lenders that have reported fourth-quarter earnings, Equitable has also seen delinquencies start to rise. Net impaired loans among its residential mortgage lending rose to 0.37% of the portfolio, up from 0.25% in the previous quarter.

“We are seeing some people at the margin…having a little bit of challenge to make those payments, but it’s not really translating into anything in the way of losses,” Moor noted.

Highlights from the Q4 earnings report

• Net income (adjusted): $147 million (+59% YoY)
• Earnings per share (adjusted): $3.80
• Assets under management and administration: $111 billion (+8%)
• Single-family alternative portfolio: $30 billion (+%)
• Insured multi-unit portfolio: $20 billion (+27%)
• Net interest margin: 2% (+13 bps)
• Net impaired loans (residential loans): 0.37% (+12 bps QoQ)
• Reverse mortgage loans: $1.5 billion (+43%)
• Avg. LTV of Equitable’s uninsured single-family residential portfolio: 62%
• Provisions for credit losses (PCLs): $19.6M (+50% QoQ)
• CET1 ratio: 14% (+30bps)

Notables from its call

• Equitable noted that it does not offer single-family variable-rate mortgages that could trigger negative amortization.
• Nearly 100% of EQB’s lending portfolio is secured and approximately 52% is insured.

CEO Andrew Moor commented on the following topics during the company’s earnings call:

• On retention rates: “…loan retention is much higher, and this is a tailwind we expect to continue into 2024…We’re sort of 10% ahead of where we would normally be…it’s been the case throughout the last year or so. It’s fairly consistent.”
• On Bank of Canada interest rate moves: “I have a strong view that it looks like the Bank of Canada is going to be into easing sooner rather than later.”
• On the impact of mortgage rate spreads in a falling-rate environment: “What I’ve observed over the years in a dropping interest rate environment, mortgage spreads and just general lending spreads expand…Somebody is going to make a decision to drop mortgage rates in a competitive market that tends to lag a little bit…If you look at prime mortgage spreads in the market today, they’re actually quite wide based on the fact that the bonds rallied 90 basis points over the last 30, 45 days over the five year, and yet we haven’t really seen much in the way of dropping 5-year rates.”
• On mortgage volume growth in 2024: “I think we’ll see low single-digit…annualized rates through the middle of next year. As the market starts to anticipate rate cuts, you will see a bit more activity in the housing market. There’s clearly pent-up [demand], potential buyers sitting on the sidelines, a bit of a stand-off between sellers and buyers. So, I’m rather optimistic, frankly, that as we get through the first third of the year or so, we’ll see some more activity.”
• On the federal government’s recently announced Mortgage Charter: “What’s being asked for is entirely reasonable. So, it seems sensible. We’re always working with our customers if they’re looking for things to help them get through the period. But, generally, we’re very disciplined on giving relief because our experience has been that people getting too far behind on their mortgages, they can never catch up.”

Source: EQB Q4 earnings call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

This article was written for Canadian Mortgage Trends by:

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.

In Canada, economic growth stalled through the middle quarters of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is January 24, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

This article is a media release from the Bank of Canada, Dec 06, 2023.