The First-Time Home Buyer Incentive
Tuesday Sep 17th, 2019
In September 2019 the federal government has introduced the program to assist first time home buyers with a purchase of their home. The program is a bit more complex than the other government incentives I have written about, and deserves to be analyzed and discussed in more detail to highlight not only the particulars of the program, but more importantly to look deeper and determine whether you should or should not participate if you happen to qualify.
- You need to be a first-time home buyer, for the purpose of this program you are a first-time home buyer if:
- you or you spouse have never owned a home,
- you have recently experienced a breakdown of a marriage or common-law relationship,
- in the last 4 years you did not occupy a home that you or your current spouse or common-law partner owned.
- Your household income is less than $120,000, the qualifying income is not limited to earned income, it also includes investment, rental etc.,
- You must have a minimum down-payment of at least 5% and up to 20% (only CMHC insurable mortgages will be eligible).
- You will not be exempt from the stress test and other financing qualifications.
- You can borrow up to four times your qualifying income, that means the maximum mortgage amount, including CMHC loan, in order to participate in the program will be $480,000 for people with a household income of $120,000, if the household income is $80,000 the maximum allowable mortgage will be $320,000.
- The loan amounts are capped as follows:
- 5% or 10% for a first-time buyer’s purchase of a newly constructed home
- 5% for a first-time buyer’s purchase of a resale (existing) home
- 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
- The above limitations effectively cap the total house purchase price at $565,000.
- The amount has to be repaid at the earliest of:
- 25 years or
- When the property is sold.
- You have an option to repay the full amount before the 25 years period is up or before the house is sold.
Program update for buyers in the Toronto, Vancouver or Victoria Metropolitan Area.
- Annual income increased to $150,000 (instead of $120,000)
- Borrowing up to 4.5 times the annual income (instead of 4 times).
The costs and savings of the loan
- It’s an interest free loan, meaning no interest is charged during the term of the loan.
- Because the principal amount of the regular mortgage is lower, you are saving on the interest amount, you are also reducing the mortgage insurance premium.
- It is an equity loan, meaning the government effectively becomes part owner of your house, and the loan repayment amount is based not on the amount you borrow, but on the value of the house at the time of repayment.
- The loan application is done through your financial institution, fees may apply.
What it means in real life
In the expensive real estate market such as GTA and GVA you will be very limited to what kind of property you can buy when participating in this program. GTA market has been very strong recently, in Toronto you will be limited to a small condo, other areas of the GTA may offer a little more but not much. The cheaper the market the more opportunities to participate, for example at the time of writing this blog there were approximately 600 residential listings in the Greater Sudbury area of which 480 were listed below $550,000 (at the moment the Liberal leader is promising to raise the mortgage limit from $480,000 to $750,000 in areas such as Victoria, Vancouver and GTA as part of his election campaign).
Furthermore, many first-time home buyers are able to afford more expensive homes and will be able to purchase them by not participating in this program. For example, if your family income is $100,000 per year, have $50,000 down-payment, and good credit rating and no other loans (car, student loans etc.) you are likely to qualify for a house purchase exceeding $600,000.
The second very important aspect of the program is the savings you can achieve. Your down payment will be increased by the amount loaned in this program, and you will pay less interest over the term of the loan. If the amount of CMHC loan contributed towards the down-payment is $50,000 you will automatically save $2,749 in mortgage insurance premiums and the monthly interest savings based on 2.75% interest will be $115 Over the course of one year you will save $1,375 in interest, and over the period of 25 years the savings will be $34,375, that is quite significant, but is there a catch? Yes, there is, please read below.
It is an equity loan, meaning the government is participating in value fluctuations of your property, the repayment amount is not based on what you have borrowed but on the value of the property at the time of repayment. If you think that the value of the property will not go up, or the value will go down (if you think that should you buy the property in the first place?) participating in the program is probably a good idea, but what if the property appreciates in value? If the property value goes up for any reason your repayment amount will also go up regardless if you have renovated the kitchen, constructed a $500,000 addition, or did nothing. If the value went up, the house purchased for $500,000 with a $50,000 CMHC loan sold years later for $900,000 will create a repayment amount of $90,000. You will be required repay $40,000 more than what you have borrowed, and the additional repayment amount will exceed the potential interest savings you would have enjoyed over the 25 years period.
Should I participate in the program?
In my opinion, your goal should be to save 20% for the down-payment and avoid the CMHC mortgage insurance. If that is not possible and you can only come up with 5%, live in an area where the expected price appreciation is moderate, and you do not plan on making any significant improvements to the property. If that is the case, then the program is for you. Otherwise, I would advise to avoid it.
If you have any questions or comments please contact us.