Everything that you need to know about the new First-Time Home Buyer Incentive and how it can end up costing you more!
Simple Money Podcast – Canada’s Own Personal Finance Podcast
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Hello and welcome back to Simple Money Podcast, Canada’s own personal finance podcast that presents personal finance issues in short and informative episodes. I’m your host, Matthew Siwiec, also known as the friendly financial coach.
Today we explore in detail the newly launched first-time home buyers plan and what we think about it. The program launches later this year on September 2nd, 2019 and properties must close on November 1st or afterwards. The goal of this program is offer support for first-time homebuyers looking to buy a property in Canada.
To support the homebuyers, CMHC would contribute 5 to 10% of the purchase price and retain the equivalent equity ownership in the property. So for example, if CMHC contributed 5% towards the purchase then they would have 5% equity ownership in the property. The big benefit of this program is that the incentive would act as an additional 5 or 10% on top of their down payment. So for example, your down payment would effectively be 15% if you had 10% down with an incentive bonus of 5%.
This extra down payment would then reduce CMHC fees and would reduce the size of the mortgage required – which would also effectively reduce mortgage interest and payments.
Unfortunately, this program comes with some serious downsides – ones that we will explore later in the episode.
First-Time Home Buyer Incentive: Details
So let’s dive into the details now and get a little technical
Homebuyers are able to receive an incentive of 5% when they purchase a resale home or 10% for purchases of new builds.
There are quite a few borrower qualifications that must also be met. Household income must be under $120,000 and the total amount of borrowing cannot exceed 4 times this amount – which is a max of $480,000. This total borrowing amount includes the mortgage and homebuyers incentive, but does not include any CMHC fees. So for example if a household had a combined eligible income of $100,000, then the maximum mortgage and incentive that they can receive is $400,000.
The 1st charge mortgage must be over 80% and be CMHC insured. This means that the maximum down payment must be just under 10 or 15% depending on the incentive paid. So continuing the previous example, this couple would be able to put down a max down payment of about $44,400 for a new build or $70,500 for a resale. This would translate to a maximum purchase price of $444,400 or $470,500.
Required Down Payments
Down payments are also required to come from traditional sources like personal savings or investments, RRSPs, and non-repayable gifts from family members. Excluded are funds from unsecured loans or line of credits. Overall, the maximum eligible purchase price for a property is about $564,000 for households that have eligible income of $120,000. The amount than decreases when a household earns under that.
And this brings us to the first issue. This program will mostly benefit Canadians that live outside of regions with high house prices. Real Estate data shows us that the average home in Canada is just over $500,000 and major city centres like Toronto are just under $800,000.
So the concern here is that this benefit will only be available for first home buyers in select regions in Canada.
Who Is A First-Time Home Buyer?
Moving on, at least one of the borrowers must qualify as a first-time homebuyer. In cases of joint purchase, with only one first time homebuyer – The available information is not clear if qualifying income for the program will be just the for the qualifying buyer or the whole household income. So to qualify as a first-time homebuyer,
- Never purchased a home before
- You have gone through a breakdown of a marriage or common-law partnership (even if you don’t meet the other first-time home buyer requirements).
- in the last 4 years, you did not occupy a home that you or you current spouse or common-law partner owned
- The 4-year period begins on January 1 of the fourth year before the year you purchased your home. It ends 31 days before the date you purchase your new home. Here are a few examples:
- if you purchase a home on March 31, 2019, the 4-year period begins on January 1, 2015 and ends on February 28, 2019
- if you sold your home you lived in in 2013, you may be able to participate in 2018 or if you sold the home in 2014, you may be able to participate in 2019
- Mortgage loan must be over 80% LTV and no less than minimum down payment
Eligible Property must also be 1 to 4 units, be in Canada and suitable for all year residence – meaning that seasonal properties like cottages will not qualify.
Repaying The First-Time Homebuyer Incentive
Borrowers will also need to able to qualify for their mortgage. So once you qualify for the program you will eventually need to pay back the incentive. The amount that you owe is the equity ownership percentage multiplied by the market value of the property. So for example, if you received an incentive of 10% and the market value of the property was $700,000 when you dispose of it – then you would be required to repay back $70,000. Repayment can be triggered at the earliest of three different periods. Either through voluntary repayment, when you sell the property or in 25 years. And this brings up one of my biggest concern. If a household resides in a property for 25 years then they can have a really large payment that would be due. To give a hypothetical example, say we have a situation where a new build had a purchase purchase of $400,000 and the household decides to hold onto the property for over 25 years. The incentive would be up to $40,000 at the time of purchase.
Say that this property increases by 5% per year on average over 25 years. After 25 years, this property would have a future market value of $1,354,540. This means that the homeowners would be required to repay back 10% of this value – which is a whooping $135,454 in future dollars.
While this repayable amount is in future dollars, it will still be a challenge to repay back – especially since the household would have probably just paid off their mortgage and would be nearing retirement. The solution for this would be either to use existing resources, sell, or refinance the property.
Hold onto this information, because we will be continuing this example shortly. The big benefit for this option is that the homeowners would have a lower mortgage than they would previously have acquired and CMHC fees would be reduced. The mortgage would be decreased by the 5 or 10% of the incentive. This would also reduce the amount that a household would have to pay in mortgage interest.
So using an example, a $400,000 home would come with a mortgage with only a 10% down payment and CMHC fess included would have an approximate monthly payment of $1,853 while a mortgage with a 10% incentive included would have a payment of $1,642. – So payments would be over $200 less a month. If held for the full 25 years – the interest saved would be just under $21,000. This difference also includes a reduced CMHC fee.
The Big Problem of the Incentive
Unfortunately, after doing the math there is a fatal flaw in this program – What I see is that you will likely end up paying more money in the long run.
The amount that you have to repay back will likely grow at a much faster rate than what you would save in mortgage interest and fees. The government’s equity portion would grow by an increasing property value, while mortgage interest would grow on a declining mortgage amount. While this is not always the case, but a likely one.
This is where I recontinue the early example – The amount of $135,454 is $77,662 in today’s dollars using an inflation rate of 2.25%. Subtracting the $40k incentive, you would have paid a premium of just over $37 and a half thousand in today’s dollars. Minus the interest savings of $21,000 and you would have paid an extra $16 and a half thousand using this program.
The good news is that there is a way to overcome this problem – pay the mortgage amount that would have been in place if you didn’t take the incentive. This would effectively have you overpay your mortgage by over $200 a month, cut down the mortgage amortization by just over 4 years, and best of all – save another $30,000 in interest.
That’s it for today and thanks for joining our podcast today. If you’re enjoying the show, you can support the show by rating or sharing the show with anyone that you may think that it will benefit. You can also contact me at email@example.com or find me on Twitter at F_FCOACH Take care and talk to you soon!