Deposit Insurance for Freehold Home Builders
It seems that the first five months of 2019 have been some of the more challenging times in recent memory for developers. While there are a variety of factors to consider, the mortgage stress test has deeply impacted the marketplace, especially with regards to first time home buyers. News reports of developer bankruptcies and project cancellations have also increased concern for buyers. As such, many free-hold developers are reporting much slower sales for new project launches. While two years ago, a housing development of 300 homes could sell out over a weekend, today it can take upwards of six months and often developers are still left with unsold inventory. To combat this, many of our free-hold developer clients have decided to offer their home purchaser’s deposit insurance as an incentive towards increasing sales. This product is typically referred to as Excess Home Deposit Insurance or EHDI. This product provides a voluntary insurance coverage to purchasers of freehold homes in excess of what is provided by Tarion.
A summary of the Tarion coverages can be found here:
As an example, if a home is being sold for $1,500,000 with a 20% deposit the coverage would be as follows:
- Purchaser to receive $300,000 in deposit insurance coverage
- Tarion to cover first 10% up to $100,000
- EHDI policy to cover $200,000 ($1,500,000 * 20% – $100,000 covered by Tarion)
For a home with a lower value, for example, $850,000 with a 20% deposit the coverage would be as follows:
- Purchaser to receive $170,000 in deposit insurance coverage
- Tarion to cover first 10% up to $85,000
- EHDI policy to cover $85,000 ($850,000 * 20% – $85,000 covered by Tarion)
An EHDI facility is approved as an aggregate facility for the project as a whole, and individual insurance policies can be issued to each purchaser on a case by case basis under the approved facility where required. Some of our clients choose to extend this coverage to all purchasers and include it in the purchase price, while others choose to offer this as an option at the time of purchase, payable by the home buyer.
Rates for this product are typically in the .75%-1.5% range (based on the amount of deposits insured – and renewed until final closing).
Revisiting the examples above, the costs would be as follows assuming a .75% rate:
Example 1) $200,000 EHDI Policy * 0.75% = $1500
Example 2) $85,000 EHDI Policy * 0.75% = $637.50
Note: These rates are for a 12 month period.
The policy wording can be viewed here: EHDI Sample Wording
In order to apply for an Excess Home Deposit Insurance facility the following list of documents are required:
- A copy of the standard form project agreement of purchase and sale, with Tarion statement of critical dates;
- Project land title details (to confirm the ownership entity and any existing charges/mortgages);
- The project budget and revenue proforma;
- The project construction financing commitment (or draft/letter of intent);
- Financial/personal net worth statements for the project company, and project shareholders;
- The project Tarion Risk Assessment letter (conditions of registration).
- A listing of any sales to date.
With any questions, please give us a call for additional insight and information.