Canadians are right to feel that the money they have entrusted to the nation’s banks and trust companies is protected should the financial institution holding their funds cease operations. However, few understand the details of the government-backed program in place to safeguard their savings beyond the generally publicized $100,000 limit.
But what if you have more than $100,000 and don’t want to deal with multiple institutions? Or what if you wish to take advantage of an attractive interest offer from a particular institution?
The reality is that you can deposit significantly more than $100,000 per institution and still be eligible for deposit insurance. You will have to abide by certain conditions, but by keeping these points in mind, it is entirely possible to arrange for deposit amounts greater than $100,000 to be eligible for CDIC insurance.
First, it’s important to ensure that you are placing your funds with a member of the Canadian Deposit Insurance Corporation (CDIC). Home Bank and Home Trust Company are each separate members of CDIC.
The CDIC is a Crown corporation and is responsible for insuring the deposits held with CDIC member institutions based on a series of prescribed conditions. Funding to support the CDIC is provided directly by member institutions.
Second, confusion around the $100,000 coverage limit is understandable as even the CDIC website mentions this limit. However, it is important to understand that this limit applies to each eligible category type, and for each individual depositor. The list of eligible categories includes the following account types:
- Accounts held in a single name
- Joint accounts
- Registered savings accounts including RSP, RIF, and TFSA accounts
- Accounts held in trust
- Accounts used specifically for paying taxes on mortgaged properties
Because most financial institutions offer several of these deposit types, with a little planning it is quite possible to ensure CDIC insurance eligibility well beyond $100,000.
For instance, a couple can set up three non-registered deposit accounts – one in the name of each spouse and one held jointly – to provide for a total of $300,000 in CDIC eligibility. Include deposits held in additional registered accounts such as an RSP, RIF, and a TFSA, and you can further increase the amount of CDIC insured deposits held with a single institution.
In the unlikely event that a CDIC member financial institution does end operations – the last failure was in 1996 – the CDIC aims to reimburse funds to all depositors with no action required by affected depositors during the reimbursement process.
Lastly, Oaken Financial’s deposits can be provided by either Home Bank or Home Trust Company. Since both are members of CDIC, this makes it possible for you to further increase the amount eligible for CDIC coverage.
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You've likely already heard from the June 22 announcement that Berkshire Hathaway Inc. has agreed to acquire C$400 million of Home Capital's common shares as part of a private placement arrangement. In addition, Berkshire will also provide an additional C$2 billion line of credit facility to Home Trust.
"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," explained Warren E. Buffett, Berkshire Chairman and Chief Executive Officer.
This is a resounding endorsement of Home Capital by one of the industry's most legendary and revered investors. You can read more about this important arrangement in the official press release.
So what does this mean for Home Capital?
Certainly, this agreement provides for the company's near-term liquidity needs, but it also affords more breathing room as we continue to concentrate our efforts on restoring confidence and returning to positive growth. Together with last week's announcement of a settlement agreement with the Ontario Securities Commission, it is clear that we are making excellent progress on these objectives.
On a personal note, I can tell you that everyone at Home Trust is excited by these new developments and remains committed to helping your clients achieve their investing goals. I also encourage you to take a look at our updated GIC rates as both Home Trust Company and Home Bank offers some of the highest GIC returns available.
While the past two months have been difficult, I appreciate the support we have received from so many during this time. For that, you have my thanks and we look forward to being of service to you for many years to come.
EVP, Deposits and Consumer Lending
Home Trust Company
When describing the state of the Canadian real estate market - particularly with respect to Toronto and Vancouver - terms like "frothy" and "over-valued" are commonly used. What should never be used is the term "subprime."
"Subprime mortgage" has become synonymous with the dramatic breakdown of the U.S. housing market in 2008-2009. This was a completely American phenomenon not applicable to Canada, which operates an entirely different housing and mortgage market system based on different regulations and safeguards.
The stage for the U.S. subprime meltdown was actually set in the years leading up to the collapse itself. With U.S. housing prices rising, American lending institutions resorted to all kinds of questionable tactics and lending criteria rules and credit checks increasingly fell by the wayside. Many new U.S. buyers were able to secure 100% or more of the home's value with little in the way of supporting documents and background checks.
When property value increases slowed in the first part of 2008, two more distinctly American circumstances conspired to make the situation much worse - the principle of nonrecourse debt and the collateralization of questionable mortgages.
Nonrecourse debt refers to a loan that is secured by collateral - typically property - and because it is secured by a guaranty of a physical asset, the borrower is not personally liable. In many U.S. states, a mortgage is considered nonrecourse debt, so when a homeowner finds themselves behind on their mortgage, they can simply turn over the home and walk away.
American borrowers began walking away in large numbers in 2008, leaving outstanding loans that were considerably greater than the value of the house they abandoned. That left U.S. banks holding properties with outstanding mortgages far greater than could be recovered by selling the asset.
Meanwhile, because many U.S. mortgage lenders had tremendous exposure to the real estate market, and because they were looking to offset this risk and find additional streams of income, the practise of pooling individual mortgages and selling shares of the pool became widely prevalent. These pools are called Mortgage Backed Securities (MBS).
As the mortgages in these pools defaulted, the value of the MBS shares themselves crashed. It was the unravelling of these investments that led to the U.S. and, ultimately global, financial crisis in 2008.
In Canada it was an entirely different story. Both in 2008, and today.
In Canada, there is little chance of such wide-ranging carnage. Only Saskatchewan and Alberta have nonrecourse mortgages, and even in these two provinces, you can't simply walk away from your mortgage obligation and not expect a severely negative impact to your credit rating.
In addition, Canadian mortgage regulations require larger minimum down payments and also require separate insurance for those with lower down payments - two important safety measures not present in the U.S. market.
Finally, there is simply no comparing the underwriting practises in the Canadian banking system to the wild days leading up to the American subprime crisis.
That's why global leaders view Canada's banking system as one of the most stable in the world. It's also why Canadians escaped from many of the worst impacts of the recession following the 2008 meltdown.
Canada's housing market regulations have only strengthened since then. And the truth is, Canadians pay back their mortgages, in overwhelming numbers. The Canadian default rate on mortgages is among the lowest in the world.
So while no one can say for certain what the future brings, we can be confident that Canada is not at risk of its own subprime crisis.
Home Capital is an alternative mortgage lender. We are highly regulated and are dedicated to meeting or exceeding the strictest underwriting standards. We serve the roughly 1-in-5 Canadians who don't qualify for a mortgage with the big banks. We help them realize their dream of home ownership.
Chances are that you, or one of your neighbours, has a mortgage from an alternative lender like Home Capital.
Still, there are those who would like to see an end to alternative lending. If that were ever to happen, the loss of these prudent, responsible financial institutions will be most deeply felt by those Canadians who depend on us to realize their home ownership goals.
And the need for Canadians to have a non-bank lending option will only intensify in the coming years as more immigrants make their way to Canada and more workers join the ranks of the self-employed.
A recent Statistics Canada update shows that 2.7 million Canadians - nearly 16% of the country's working population - is currently self-employed. This number is expected to increase as more employers replace full-time workers with contract positions and the hiring of freelancers on an as-needed basis.
The Canadian alternative lending market is comprised primarily of these two groups - people who are new to Canada, and individuals who are self-employed. While they may appear to have little in common, they do share two common traits - neither group automatically represents undue credit risk, and both are typically underserved by the country's major banks. In fact, these two groups often overlap as many recent immigrants are self-employed.
Canada's Tier 1 banks continue to underserve these groups simply because they don't match their preferred borrower profile and lending guidelines. This customer segment can often fall outside these criteria. Rather than take the time to understand each applicant's needs, these institutions may choose to simply reject the applicant outright.
Home Trust and other lenders specializing in serving these individuals learned long ago that by taking the time to understand each borrower's unique story, it is possible to serve this growing segment of the public without taking on excessive risk. This has been borne out by the company's 30-year history and default rates that, historically, are similar to the default rates reported by the major banks.
As noted in a recent Financial Post article authored by Dr. Jack Mintz, President's Fellow of the School of Public Policy at the University of Calgary, Home Trust's parent company, Home Capital, reported an annualized loss provision of just under $6 million for the first quarter of 2017. This represents a mere 0.13 percent of the company's gross loans and is very much in line with Canada's chartered banks, which reported an allowance for loan and investment losses of 0.12 percent mid-way through 2016.
Clearly, Home Trust's loan losses are well within the range of the big banks. That alone should put to rest any suggestion that alternative lenders like Home Capital are engaging in overly risky lending practises. And it provides further proof that current lending practises are in no way endangering the Canadian housing market.
Those who would suggest the Canadian housing market is on track to mimic the great collapse of the U.S. market just less than a decade ago seem to have ignored these realities.
In reality, there is a world of difference between the U.S.-style subprime mortgage crisis and the alternative market in Canada, but, unfortunately, this fact seems to have been lost.
Canadians should be proud of the stability of our mortgage and banking systems, and should be aware that alternative lenders like Home Capital have an important role to play.
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Home Trust is a federally regulated trust company and a wholly owned subsidiary of Home Capital Group Inc., a publicly held company that trades on the TSX under the symbol HCG.