New home deposit protection changes coming to Ontario
Friday Jul 14th, 2017
When new home buyers put down a deposit on a new home or condominium in Ontario, they enjoy peace of mind that their deposit is protected should anything go wrong with the sale.
Since 2003, Tarion, which backstops the new home warranty, has provided consumers with deposit protection of up to $40,000 for new freehold homes and up to $20,000 for condominiums. Condominium deposits also have the added protection of being placed in trust and protected under the Condominium Act.
This level of protection has worked well over the years, but a lot has changed since 2003. The prices of homes, particularly in the GTA, have sky-rocketed in recent years. Ontario has also seen the collapse of large builders — most notably Urbancorp, but others as well.
That's why in 2016, Tarion committed to review deposit protection for freehold homes. Tracy MacCharles, the minister of government and consumer services, also publicly stated last March that she wanted a review to go ahead.
The review has been looking at three options. The first is to put all freehold deposits in trust, similar to condominium deposits. This would be an effective protection for consumers, but could act as a barrier to new builders entering the industry because builders of freehold homes use deposits as working capital to finance their construction of new homes.
A second option is to increase the deposit protection cap — perhaps to $50,000 or $60,000 — or to use a formula, such as 10 per cent of the purchase price (but not less than $40,000).
This option provides better deposit protection for consumers, but could result in a small rise in enrolment fees that may be passed on to the consumer. Still, builders of freehold homes would have more working capital and new home sales may rise, boosted by increased consumer confidence.
The third option is a blend of the first two: an increase in the deposit cap and any funds collected above that cap must be held in trust. Consumers would enjoy enhanced protection and builders would have greater working capital, although they would need to take on the extra work of administering the trust provisions.
Under all options, consumers enjoy greater protection, but there are trade-offs that have to be considered before a final decision is made. The Ministry of Government and Consumer Services is expected to make an announcement this fall.