New First-Time Home Buyer Incentive: What You Need to Know

Photographer: Austin Distel | Source: Unsplash

Starting September 2, 2019, first-time homebuyers can apply for the Government of Canada’s new first-time home buyer incentive program. The new shared equity mortgage program is being touted as an interest-free loan from Canada Mortgage and Housing Corporation (CMHC) to help lower mortgage costs for eligible Canadians.

Read on to learn how the First-Time Home Buyer Incentive program works, who’s eligible and, most importantly, if it is worthwhile.

First-Time Home Buyer Incentive (FTHBI) basics:

• Eligible household income must be under $120,000
• Homebuyers must still provide a minimum 5% down payment on your own
• First-time homebuyers must have not occupied a home in the previous four years that you or your spouse/partner has owned
• The total amount borrowed (your combined mortgage amount plus incentive) cannot exceed four times your household income
• All other mortgage stress test criteria and normal default-insurance requirements must also be met
• The incentive must be repaid after 25 years or if the property is sold; repayment amount is based on the property’s fair market value

How much money can you borrow?

• 5% for an existing re-sale home
• 5% or 10% for a new construction
• 5% for new or existing mobile/manufactured home

How does repayment work?

For a 5% incentive, you will repay 5% of the home’s value at repayment. For a 10% incentive, you will repay 10% of the home’s value at repayment. CMHC shares in both the proportionate gains or losses in home value.

For example, if you receive 10% of the cost of a new $400,000 home through the First-Time Home Buyer Incentive program ($40,000) and the selling price for that home 10 years later is $440,000, the repayment amount would be 10% of the home’s current value, or $44,000.

You can repay the incentive in full at any time without a prepayment penalty, however, you cannot make partial payments.

How much can you save on mortgage payments?

Let’s take a look at some of the basic savings you can expect if you take advantage of the incentive program based on current average home prices in Edmonton. The following table assumes a 5% downpayment and a 5-year 2.99% mortgage over a 25-year amortization. It does not take into consideration any FTHBI transaction fees (at the time of publishing, none had been announced yet).

Assumes a 5% downpayment and a 5-year 2.99% mortgage over a 25-year amortization.

Gambling with Federal money — Do homeowners actually win?

On the surface, the FTHBI sounds pretty great — an interest-free loan to reduce mortgage payments for first-time homebuyers? Yes, please! But when you deep dive into eligibility criteria and work through some of the finer points, it’s a little less clear who really benefits from the program. Here’s a few things to consider before you apply for the FTHBI:

Hopefully you don’t want to buy in Vancouver or Toronto

To qualify for the maximum allowable purchase price (approx. $565,000), you would need a household income of $120,000 a year and a 14.99% downpayment of your own money. Cities like Vancouver or Toronto don’t have a lot of housing inventory in that price range, so the program won’t be much help to first-time buyers in those markets.

Investing in major home renovations or improvements? Be prepared to share the profits

The government is clearly banking on the appreciation of property values over time. But if you invest in major improvements that dramatically increase the value of your home, just bear in mind that the government will reap some of the benefits too.

FTHBI’s loan-to-value rules reduce the total down payment to less than 20%

If you take the 5% incentive, the maximum down payment you can make is 14.99%. If you take the 10% new-build incentive, the maximum down payment you can make is 9.99%.

How does FTHBI help Edmonton homebuyers?

The new incentive program works well for first-time homebuyers looking to purchase a starter home or condo under $500,000. The catch is that buyers need to be willing to give up 5% of their home’s future value in exchange for lower monthly payments.

Compared to some of Canada’s biggest cities, there’s a good inventory of Edmonton homes below the maximum allowable purchase price (approx. $565,000), particularly duplexes and condos for sale. Those who stand to benefit the most from FTHBI are likely homebuyers who don’t necessarily need an incentive to qualify for a regular mortgage, but will take advantage of an opportunity to save on interest and premiums, particularly in markets where home prices are not expected to skyrocket in the short term (like Edmonton), while investing their mortgage savings elsewhere for a better return.

Are you a first-time homebuyer? Would you use the First Time Home Buyer Incentive?

I’d love to hear your thoughts and I’m always available to help first-timers find a great property in Edmonton! Call me at 780.238.7384 or request a consultation.