Federal Government changes to Mortgage Guidelines

It looks as though the federal government has decided to tighten Canadian mortgage guidelines once again. Here are the key changes: · Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years. · Maximum amount Canadians can borrow against the value of their homes, lowered to 85% from 90% on a refinancing · Federal government backing for home equity lines of credit, or so-called HELOCs, is removed · Adjustments on amortization and refinancing limits coming into force on March 18 · Government backing on HELOCs will be removed as of April 18 Here is the related article taken from Sunday's Financial Post: The federal Conservative government is expected on Monday to introduce new rules aimed at toughening up mortgage lending in an effort to curb further growth in record household debt levels. The key change Finance Minister Jim Flaherty is likely to unveil is a cut in the maximum amortization period, to 30 years from 35 years. Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. Government sources also told the National Post Mr. Flaherty is expected to lower the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, and remove federal government backing of home equity lines of credit, or so-called HELOCs. The sources, who spoke on condition of anonymity, add the minimum down payment, at 5%, will remain as is. Further, there will not unveil any plan to target condominium purchases by requiring monthly condo fees be added to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage. The changes to the country's mortgage rules - the second in as many years - emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year. That surpasses the level of debt held by American households, whose appetite for borrowing helped stoke the financial crisis of a few years ago. The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a "significant change" in how consumers borrow and banks lend. Bank of Canada governor Mark Carney said policymakers have a "responsibility" to look at the benefits of pre-emptive action. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards. Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages. He said the government "remains concerned about growth in the level of household debt and will look at taking prudent steps to moderate that growth. We will look at what steps may or may not necessary. In February of 2010, Mr. Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan; reduced the amount Canadian can borrow against their home, to 90% of the property value from 95%; and require purchasers of rental properties to issue a 20% down payment as opposed to 5%. The moves played a role, observers say, in slowing down real estate activity. The new changes, though, reduce even further the amount people can borrow against their homes, to 85%. Also, the changes target HELOCs, which Mr. Flaherty cited as a source of concern in a recent interview. Home-equity lines of credit surged 170% over the past decade, or twice the rate of mortgage growth, and now represent 12% of overall household debt. With the new rules, Ottawa will no longer back the HELOC, as it was doing up until now through mortgage insurance. Instead, sources say, the government will signal that the banks are on the hook for any default linked to a HELOC it issued. The cut in the amortization period, or the time required to pay off the home loan, follows a 2008 move by Ottawa to stop insuring 40-year mortgages. While the federal government looks to curb borrowing, economists say the Bank of Canada may have to follow by raising its key interest rate sooner rather than later. The central bank issues its latest rate statement on Tuesday and it is expected to hold its benchmark rate at its present 1% level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States. Stewart Hall, economist at HSBC Securities Canada, said the extraordinarily low-rate environment "provides all the incentive to consumers to borrow and spend and none of the incentive to save. You can try to [regulate] that away but that is apt to be fraught with significant frustration."

Fixtures, Chattels and Flat Panel TVs

Recent dramatic price reductions in the cost of plasma, LCD and LED televisions have resulted in flat panel TVs becoming some of the most popular electronic devices. Today you would be hard pressed to find a household without one or more flat panel televisions and at least one of these will likely be mounted in an elevated position on a wall by means of a mounting bracket.

The question that arises is how should flat panel televisions be dealt with in a real estate transaction?

For reasons that will be discussed in greater detail in this article, if you have your hearts set on removing a mounted television when you move out, then you’d better be listing this item as a “fixture” not remaining with the property. On the other hand, if you want that wall mounted television and bracket, then, as the buyer, in the offer to purchase you should be specifying these items as a “chattel” to remain with the property on closing. Anything else, and in particular remaining silent about this item in the contract, is likely to give rise to disappointment and hurt feelings on possession day.

Relevant provisions in the standard form contract

A number of years ago AREA’s standard form contracts introduced the plain language terms “attached” and “unattached” goods to replace “fixture” and “chattel”. The key provision in the Residential Real Estate Purchase Contract that deals with this issue is paragraph 1.1 which states that:

“The Property is the Land, Buildings, Attached Goods (unless excluded) and included Unattached Goods located at (municipal address):.................”

If clauses 1.3 and 1.4 are left blank, then the contract includes everything that is attached to the property and excludes (the seller is entitled to remove) everything that is detached from the property. Clauses 1.3 and 1.4 are provided to enable the parties to deviate from the default provision. Most commonly one will find standard kitchen appliances listed in clause 1.3 (unattached goods to be included) as “stove, fridge and dishwasher”. This is problematic because failing to be specific in terms of the make, model and colour of the appliances can lead to substitutions of appliances by sellers prior to possession day. Such substitutions are difficult to prove and therefore remedy. Clause 1.4 (attached goods to be excluded) is used less frequently, but might indicate “the heirloom dining room chandelier” as being an attached good that the seller intends to remove from the property on closing.

Clearly the key to completing these clauses correctly is an understanding of what constitutes “attached” and “unattached” goods.

The Common Law

All available court precedents that have addressed this issue have done it in the context of “fixtures” and “chattels” rather than the new terminology. I expect, however, that the same analysis would apply. The clearest rules that I could find were set out in a British Columbia decision (Royal Bank of Canada v. Maple Ridge Farmers Market Ltd. S.C.B.C. 1995, No. A950858) as follows:

1. Any item which is unattached to the property, except by its own weight, and can be removed without damage to ... (the premises) that will need repair, is a chattel.

2. Any item which is plugged in and can be removed without any damage or alteration is a chattel.

3. Any item which is attached even minimally (i.e., it cannot simply be unplugged) is a fixture. For example, if an item requires the removal of screws, nails, bolts, detachment of plumbing, or the cutting and capping of hardwire, it will be a fixture.

4. If a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture.

The foregoing makes it clear that any appliance which is simply plugged into an electrical outlet but otherwise stands on its own is a chattel (unattached good) but the moment that the appliance is screwed or glued or otherwise attached to a cabinet or wall it becomes a fixture (attached good). It also makes it clear that if a part of an appliance can be removed (such as attachments to a vacuflow or remote controls for a garage door opener) but would be useless without both parts, then all of the parts are considered to be a fixture.

Analysis

Where does the foregoing leave us with respect to common appliances and the flat panel TV?

Stove: could be an attached or unattached good depending on whether it is free standing and only plugged into an electrical outlet, or built in or wired directly into the electrical system.

Cook top: will usually be wired directly into the electrical system or gas line, and as a result is an attached good.

Refrigerator: can be either free standing or built in or, potentially, directly tied into a water line if it has a water cooling or ice making feature and, as a result, could be either a chattel or a fixture.

Dishwasher: needs to be connected to the water supply and may be wired directly to the electrical lines (rather than plugged in) and, in addition, will likely have some screws attaching it to the cabinets, and, as a result, will be an attached good.

Microwave oven: can either be a free standing chattel (if it is simply standing on a ledge) or a built-in fixture (if it has venting grills attached to both the appliance and the cabinets).

Garbage compactor: unless there are some screws to hold it in place, will usually be a free-standing appliance.

Washer and Dryer: may be either attached or unattached goods depending on the nature of the connection of the water lines to the washer and the exhaust vent from the dryer.

Garage door opener: is always a fixture as the motor is bolted to the ceiling of the garage and connected to the garage door. The remote controls are an integral part of the whole as they are useless without the motor.

Ceiling fan: is always an attached good as it will be screwed to the ceiling or the electrical box.

Vacuflow system: is always a fixture due to the motor being attached to the wall and the system pipes, and the attachments are an integral part of the whole.

Wall-Mounted Panel Television: First of all, there is no question that the mounting bracket is an attached good as it will be screwed directly into the wall. However, the television itself is more problematic. Unlike the power head of a vacuflow system, the television could be removed from the bracket and still function and be useful on its own. However, rarely will a wall-mounted television simply hang on a bracket by its own weight. Usually there will be some degree of attachment to the bracket by screws, bolts or safety pins. This would make it appear to be more of an attached rather than an unattached good.

Conclusion

In order to avoid misunderstandings and problems on possession day, where doubt exists about any goods being attached or unattached, it is best to list such goods in either 1.3 or 1.4 depending on what the intention of the parties may be. Frankly, even where there is no doubt at all about an item being a “fixture”, there is no harm in a buyer including it under clause 1.3 in order to avoid a misunderstanding on closing.

courtesy of Lubos K. Pesta