Wednesday, September 4, 2019

6 things to know about Trudeau's First-Time Home Buyer Incentive



The federal government’s new incentive aimed at improving affordability for first-time homebuyers is about to launch on Sept. 2.  

Ottawa has earmarked $1.25 billion over three years for the First-Time Home Buyer Incentive (FTHBI), which is designed to lower new homeowners’ monthly mortgage payments without boosting their down payment costs.

While this may seem like good news for prospective homebuyers, the incentive has come under intense scrutiny since it was announced in March, with some arguing it won’t help those looking to live in the country’s most expensive markets.

So before you apply, here’s everything you need to know about the incentive.

1. It’s a shared-equity program   

Run by the country’ federal housing agency, the FTHBI is a shared-equity mortgage program, meaning the government shares in the gains and losses of your home’s value as it fluctuates over time. Through the incentive, Canada Mortgage Housing Corp. (CMHC) will offer 10 per cent toward the down payment for a new home, and five per cent for resale homes, interest-free.

2. Not all first-time buyers will qualify

First-time homebuyers with a combined household income of $120,000, and the minimum five-per-cent down payment requirement, can apply. However, the price of the mortgage plus the incentive amount cannot exceed more than four times your household income.

“Thanks to the price limitation, the program is far less useful in high-demand markets like Toronto and Vancouver,” Rob McLister, founder of mortgage rate comparison website RateSpy.com, told BNN Bloomberg in an email.

Theoretically, the maximum purchase price of a home under this plan would be $565,000, McLister noted.

“Most first-timer buyers will qualify for far less under this program.”  

The CMHC notes the program is intended to help first-time buyers purchase a home they intend to live in, and therefore investment properties do not qualify.

3. It’s not feasible in every market

While many new buyers across the country can take advantage of the program, buyers in some markets may find it challenging to find a home selling for a price that qualifies for the program, according to a new study from Zoocasa.

In the report released Tuesday, the real estate site found that after analyzing average home prices from July 2019 in 25 markets across the country, buyers with the maximum qualifying income and the required five-per-cent down payment would qualify in 19 of those cities.

“These include markets in Eastern Canada, Quebec, the Prairies, as well as smaller urban centres in Ontario,” the report said.

“Not surprisingly, the six markets where the average home buyer would not qualify for the FTHBI include homes for sale in Toronto and several markets in its proximity in the Greater Golden Horseshoe such as Hamilton-Burlington and Kitchener-Waterloo, as well as in Greater Vancouver and neighbouring Victoria and Fraser Valley.”

Zoocasa also noted that a home buyer's ability to use the incentive in each city may range based on their income, size of their down payment, and the price of the home they want to buy.

4. You have to pay it back

Borrowers must pay the CMHC back after 25 years or once the home sells – whichever happens first. You can also pay back the loan early without penalty. The amount borrowers owe may increase or decrease depending on how the value your home changes over time.

“If the home’s assessed value rises, the loan repayment will increase by the same per cent. However, the same will occur if the home has lost value by the time it is sold or the mortgage matures," Zoocasa explained.

While the loss-sharing component of the program may seem appealing, it is “largely an illusion,” according to McLister.

“For buyers with little equity, selling after a big price correction and covering all your costs such as realtor fees, paying out the mortgage, and covering closing costs, is difficult. It's therefore less likely the government will ever actually absorb part of your losses if prices dive,” he said.  

5. It can save you money on more than just your mortgage payments

The government estimates the program could save buyers as much as $286 per month, or more than $3,430 per year, in mortgage payments on a $500,000 house.

And McLister said depending on when you sell the home, can save even further.

“People who may sell or move before their five-year mortgage term is up will likely save money with the FTHBI, McLister said.

“That's because the interest and default insurance premium savings will likely outweigh the equity give-up.”

However, first-time buyers looking to purchase the most amount of house they can afford may want to reconsider using the incentive, added McLister.

“Many FTHBI users can qualify for almost 10 per cent more home –  sometimes more – by not using the FTHBI.”

6. Level of interest in the program is unknown

The incentive is expected to help 100,000 families purchase their first home over the next three years, according to government targets.

But the expected uptake is unknown.  

“There’s a lot of buzz, but we won’t know how much actual interest there is in this until the shoe actually drops,” Royal LePage CEO Phil Soper said in a recent television interview with BNN Bloomberg.  

 “The industry is watching.”   

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