First Time Home Buyer Incentive (explained)

Patrick Fields
Published on September 27, 2019

First Time Home Buyer Incentive (explained)

Are you wondering how the new First time home buyers incentive program works in Canada?
In the video above I cover 5 KEY POINTS that will help you decide if this program is right for you!

So here is a little history, In January of 2018 The Canadian government introduced a new “stress test” which made it more difficult for buyers to purchase a home or lessened the amount of a mortgage that buyers qualified for. The idea was to stop people from getting in over their heads if interest rates were to spike when they needed to re-new their mortgage and essentially to stop people from going into foreclosure. There has been a lot of negativity about this and it has been very difficult for many people to get into the market and buy a home! So On Sept. 2nd The Canadian government introduced a new Incentive program aimed at helping First-Time Home Buyers pass that stress test!

I have spoken with many mortgage brokers and a representative from CMHC and here is what I can share:

  1. It is a limited time offer!
    Ottawa has said that they will contribute up to $1.25 billion dollars over three years for the First-Time Home Buyer Incentive, The incentive is expected to help 100,000 families purchase their first home! The government will monitor the program and perhaps extend it if it is successful. But potentially, When the money is gone this could be over!
  2. Who will will qualify
    You are considered a first-time home-buyer if you meet one of following qualifications:
    *you have never purchased a home before
    *you’ve recently experienced a breakdown of a marriage or common-law partnership
    *in the last 4 years, you did not occupy a home that you or your current spouse or common-law partner owned
  3. Are you Eligible for the FTHBI?
    So if you qualify for the program, you also need to meet the following criteria:
    Your qualifying household income is less than $120,000 per year. Qualifying income includes money you earn from investments and rental income, not just your job(s).
    You have at least the minimum down payment. The minimum down payment is 5% of the purchase price and the total amount you put down (including the incentive portion) must be less than 20% of the home’s purchase price. This maximum down-payment rule also assures that the Incentive applies only to CHMC mortgage-default-insured mortgages.
  4. It’s not feasible in every market across Canada!
    We are very lucky in Edmonton in that our average price for a single family home is around $450,000 as of the recording of this video. So many buyers in our market will be able to take full advantage of this program if they choose to! Cities like Toronto and Vancouver might not see many buyers able to use the program since their average prices are so much higher!
    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.
  5. How does the FTHBI work?
    If you meet the eligibility criteria, you can apply for the Incentive, which comes in the form of a shared equity mortgage with the Government of Canada. (It’s called a shared equity mortgage because the government shares in any gains or losses on the home’s equity. More on this in a bit.)
    The government will loan buyers 5% of the purchase price for a re-sale home, or up to 10% for a brand new one. That works out to a possible $25,000 on a $500,000 resale property, or $50,000 on a brand new home priced at $500,000. Now remember this is an interest free loan! Now however much you borrow will save you money on your mortgage payment and monthly insurance premium—anywhere around $100 to $300 per month according the federal government’s calculations.

Buyers don’t have to make ongoing payments and are not charged interest on the loan. But they do have to repay the incentive, either when they sell the house, or after 25 years—whichever comes sooner.
But here’s where it gets tricky. The repayment is not based on the dollar amount borrowed. Instead, borrowers must repay the same 5% or 10% share that they received through the incentive, but calculated as a percentage of the home’s fair market value at the time of sale, or at the 25-year mark if they are still living in it. That’s because, as mentioned above, the government benefits from any increase in equity of the home or loses out if equity goes down.

In other words, if the home has increased in value, you will need to pay back more than you borrowed. If the home has decreased in value, you’ll pay back less than you borrowed.

Here’s an example.
Anita wants to buy a brand new home for $400,000.
Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) from the Government of Canada. This lowers the amount she needs to borrow and reduces her monthly expenses.
As a result, Anita’s mortgage is roughly $250 less per month or $3000 a year. If she owned that home for the full 25 years and then sold it for the same amount as she paid, she would owe $40,000 – however she would have saved roughly $75,000 on interest over that time! Now if the house has gone up in value and is worth $600,000 – she would have to pay back $60,000 which is 10% that she was loaned initially but she gets to keep the other $140,000 increase and she saved $75,000 on interest. What’s not to like about that??
Now it may be smart to pay the loan back BEFORE you make significant renovations, as that will add to the value of the home or pay it back if the market dips – because you pay back the percentage based on the assessed value!

What does that mean in real terms?

Whenever you sell the home, you need to count on giving back the percentage of your equity.

Making the right decision for you: Incentive or no Incentive?
Buyers should also be aware that there may be extra legal, appraisal and mortgage refinancing fees involved in the administration of the program.

Talk to a mortgage professional or give me a call at 780-915-2056.

Here is a link to the National Housing Strategy website that has more information: https://www.placetocallhome.ca