More details about the First-Time Home Buyer Incentive program were rolled out this week. The intent of the plan is to help makes mortgages more affordable for qualified first-time home buyers.
Who qualifies to use the First-Time Home Buyer Incentive program?
- At least one purchaser must be a first-time home buyer
- Must not have owned a home during the last four years
- People who have gone through a marital breakdown or separation (even if they have owned a home within the last four years)
- Household income can not exceed $120,000 per year
- Canadian citizens, permanent residents, or non-permanent residents who are legally authorized to work in Canada
The maximum mortgage amount can be up to four times the amount of your annual income. If your income is $100,000 the maximum mortgage amount will be $400,000 so your purchase price will be $400,000 PLUS your down payment.
If you have $20,000 saved and the program kicks in $20,000 your purchase price would be $440,000.
As the maximum allowable income under the program is capped at $120,000 this means the maximum mortgage amount will be $480,000 (plus the related CMHC premium) plus your down payment.
This puts the maximum purchase price under the program at $530,000 (slightly higher for a brand new home).
The federal government’s new plan is slated to roll out September 2, 2019. Mortgages approved under the program can close November 1, 2019 or later. The program’s information page contains a qualifier stating that these dates may change due to unforeseen circumstances.
In a nutshell, the Government of Canada is offering either five or ten per cent towards your down payment in exchange for an equity share in your home. You must have a minimum of five per cent down from your own resources.
For existing homes, the maximum contribution from the program is five per cent; for new construction you may be eligible for ten per cent towards your down payment.
The government’s contribution is non-interest bearing and must be repaid when you sell your home or after twenty-five years.
Instead of charging interest, the government has structured this as an equity share in your home.
What this means is that when you sell your home you will repay the government the same percentage of the sale value of your home (or current value of the home if you still own it at the twenty-five year mark) as their original contribution.
As an example, you buy a home priced at $300,000. The government kicks in $15,000. Ten years later you sell your home for $400,000. Your repayment to the program is $20,000 (five per cent of $400,000).
If the market crashed and your home sold for $200,000 your repayment would be five per cent of $200,000 so in this case $10,000.
Using the example of the $300,000 purchase price, having the additional $15,000 towards your down payment would reduce your monthly payment by about $75.00. You would pay about $4500 less over the first five-year term.
If you sold at the end of five years for $400,000 your repayment of the equity share would be $20,000 – five per cent of the sale price of your home. Doing the math, you paid $4500 less but it cost you $5000.00.
Say you sell your home at the ten-year mark. For years six to ten of your mortgage, assuming a similar interest rate and no extra principal payments, with the reducing balance your payments are about $60 less per month less. So you pay $8100 less over the ten years ($4500 + $3600).
At the end of the ten years you sell your home for $500,000. Your repayment to the program would be $25,000.00. This equity share has now cost you $16,900.00.
The information released so far indicates that the government’s contribution to your down payment will be registered as a second mortgage against your home. Guessing on my part as I haven’t seen the specifics yet, I expect that this will be registered not as the original amount but in a way that protects the government’s interest in the home over time.
This means that you will likely have to repay the equity share if you are looking to refinance your home.
The promotional material I’ve seen states that the intent of the program is to make home ownership more affordable. In some instances this may be the case, but I am hard pressed to see how the program will benefit the majority of home owners over the longer term.
I anticipate that we will start to hear from lenders over the coming weeks as to how they will be handling applications for clients wishing to use this program.
I also expect we will hear more from the government over the coming months as they address the multitude of questions that have already been raised.
This is one aspect of the program for you to think about. As I said, for some people this may be the assistance that means they qualify to buy a home as opposed to having to wait longer.
For more information about the specifics of the program, check out the link to the government site on the Resources section of our webpage.
For most people, my feeling is we have to carefully consider the longer-term impact of this incentive on your bottom line. My expectation is that it will be wiser to make slightly higher payments than roll the dice and lose a significant chunk of the equity in your home.