Some change for your thoughts

Since we can no longer offer you a penny for your thoughts, how about some change instead? And by change, we mean proposed changes to Ontario’s new home warranty; specifically, strengthening deposit protection for freehold homes.

Here’s a little context on how deposit protection currently works in Ontario, and Tarion’s initial views on the best options for change.

Today’s deposit protection for freehold homes

Today, new home buyers are protected up to $40,000 when they give a builder a deposit on a new freehold home. This means that if your builder does not deliver your new home and does not return your deposit, you can contact Tarion and issue a claim for your deposit – up to a maximum of $40,000. Currently, money paid for upgrades or extras is not protected under today’s warranty.

In contrast, buyers of new condominium’s have better protections for deposits, upgrades and extras because the Condominium Act requires that builders hold a buyer’s monies in trust. So, while the new home warranty only provides deposit protection for condominium owners up to a maximum of $20,000, the effect of the trust provisions of the Condominium Act is that condo purchasers enjoy better overall consumer protection than freehold buyers.

How should we strengthen deposit protection?

So now that you get the gist of today’s deposit protection for freehold buyers, we want you to know that we are looking into how it can be strengthened.

In 2003, Tarion doubled deposit protection from $20,000 for freehold homes to its current level of $40,000. Given the changes in the new home buying market since then, new protections are merited.

Three options are outlined in this discussion guide that we used for public consultations that wrapped up on June 23, 2017. Included in all three options is a provision to include monies that purchasers spend on upgrades and extras. With that in mind, here’s a very brief summary of what we laid out for public discussion:

Option 1: Hold all freehold deposits in trust

Should freehold builders be subject to similar trust regulations as condo builders when it comes to taking money for deposits?

Option 2: Increase the cap on deposit protection

Should deposit protection levels be increased? If so, by how much? What is an appropriate formula to calculate this increase? Should we simply raise the current amount, or should the maximum level of protection be tied to a percentage of the sale price of the home?

Option 3: A mix of options 1 & 2

Should freehold builders be required to place the funds in trust in addition to Tarion increasing the cap on deposit protection?

And now, it’s time for discussion…

For each of the three options above, there are positive and negative implications that require thoughtful consideration and discussion before any change is made. Placing deposits in trust provides a strong safeguard for new home buyers. On the other hand, requiring freehold builders to hold deposits in trust could have a significant impact on their business operations and financing. Smaller builders use deposits as working capital to build new homes. Without direct access to these funds, they may not have the ability or means to continue building. There could also be corresponding barriers to entry for new builders.

Placing deposits in trust provides a strong safeguard for new home buyers.

Woman holding red piggy bank

If the cap on deposit protection was raised, homeowners would again be better protected. An unintended consequence however could be an increase in warranty enrolment fees. Further, given the sometimes wide variations on deposit amounts collected by builders across the province and amounts paid for upgrades and extras, it could be challenging to find an effective “one size fits all” solution. As an alternative, an increase could be based on a formula such as 10% of the purchase price (though in no case less than current level of protection of $40,000).

So, we’ve got a lot to think about. There’s more information in Tarion’s discussion guide and additional background materials. We invite you to give them a good read. And stay tuned: you can expect to hear more about deposit protection by the end of this year.