June 22, 2019
The First-Time Home Buyer Incentive (FTHBI), announced in the federal government’s budget earlier this year, will come into effect on Sept. 2, with the first closing on Nov. 1, 2019.
The program will “help middle-class families get on the housing ladder,” says Bill Morneau, Minister of Finance, allowing eligible first-time home buyers who have the minimum down payment for an insured mortgage with CMHC, Genworth or Canada Guaranty, to apply to finance a portion of their home purchase through a form of shared equity mortgage with the Government of Canada.
For existing homes, the incentive will be five percent, while for new homes there is a five percent or 10 percent option, with the larger share for new homes designed to boost housing supply, according to the government.
There are, of course, rules. The incentive is available only to first-time home buyers with a qualified annual income of no more than $120,000 and the insured mortgage plus the incentive amount cannot be greater than four times the buyer’s qualified annual household income.
There are no ongoing repayments required, the incentive is not interest bearing, and the borrower can repay the incentive at any time without a pre-payment penalty. The buyer must repay the incentive after 25 years, or if the property is sold, whichever comes first.
Essentially, the government becomes a partner in the home-buying process, says James Laird, co-founder of Ratehub Inc. and president of CanWise Financial.
“CMHC has confirmed that the First-Time Home Buyer Incentive program will be an ownership stake in the property of qualified home buyers, whereby the government will participate in appreciation of the property and, in the case of the property devaluing, depreciation as well,” says Laird, adding participants in the program could be forced into a smaller home, or not the type of home they may have wanted. “The key issue remains qualifying, and this program diminishes the amount that a first-time home buyer can qualify for by about 15 to 20 percent. This is because the program limits the mortgage amount to four times the households’ income, whereas those not participating in the program can actually qualify for a mortgage that is 4.5 to 4.7 times their income.”
Laird does the math.
“A household with $100,000 of income, putting a minimum downpayment of five percent, can currently qualify for a home valued at $479,888 with a $2,265.75 monthly mortgage payment,” he says. “The maximum purchase price for the same household, if they participate in the First-Time Home Buyer Incentive program, drops to $404,858.29 with a five percent minimum downpayment. The total mortgage amount would then be $400,000 or four times their household income.”
The government says the FTHBI will reduce monthly mortgage payments for first-time buyers without increasing their downpayment.
Laird does some more math.
“If the household took a five percent incentive from the government for resales, their mortgage amount goes to $378,947.37, and the monthly payment is now $1,810.90,” he says.
“If the household took a 10 percent incentive from the government for new homes, their mortgage amount goes to $357,894.73 and the monthly payment is now $1,710.29.”
Jesse Davies, of Jesse Davies and Associates, ReMax, expects the program to help first-timers get into the market — but not all markets.
“The government is offering an interest-free loan to first-time home buyers who may be lacking a down payment for a home they otherwise couldn’t qualify for or afford. It will definitely help first-time home buyers consider homeownership,” says Davies. “It will have more of an effect on markets like Calgary, Montreal and Edmonton where the average home price is still attainable for first-time buyers with an annual income under $120,000. Markets like Vancouver and Toronto, where the average home price is unattainable by a first-time home buyer, will have little effect.”
And yet, it’s the Toronto and Vancouver markets that need to increase the supply of new homes, which the government says the FTHBI will do, but I digress.
Most first-time buyers may not easily understand the program, says Davies.
“There are contingencies on maximum purchase price dependent on the down payment amount as well as income ceilings,” he says. “Buyers should speak with a local mortgage broker to see if they qualify for the program, or a local realtor or new homes salesperson on the pros and cons of the program. There are qualified brokers who are there to help the public understand these programs and whether or not it will be best suited for their personal situation.”
And, there’s at least one other, very important consideration, says Davies.
“I think it is important for buyers to understand the ramifications of a profit or loss share with the government,” he says. “A $20,000 loan could be worth a payback to the government of $40,000 to $60,000 when the time comes to sell at the maturity of their loan. If you look at long-term real estate price averages, it’s hard to find data where the price of real estate has dropped. The government obviously knows this and is willing to bet our tax dollars on it. This incentive could give a short-term boost to markets that have been seeing prices tumble for months, but is this short-term boost worth the risk the government is taking on by leveraging our tax dollars on real estate loans for a short-term gain?”