How the first time home buyer incentive works
Author: Tom Drake
Source: Maple Money
Canadian housing prices have increased substantially for well over a decade now, particularly in large urban centres like Toronto and Vancouver, making it increasingly difficult for first time home buyers to enter the market. A new incentive, introduced by the federal government in September 2019, is helping to soften the blow for the group most affected by high housing prices: First time home buyers.
What Is the First Time Home Buyer Incentive?
The First Time Home Buyer Incentive makes home ownership more affordable for qualified home buyers by lowering their overall mortgage costs. When you apply for the FTHBI, you are receiving a government loan of either 5% or 10% of the purchase price. This amount goes towards the down payment. The loan, or incentive, is considered a shared equity mortgage because the government is sharing in the increase or decrease of your home's fair market value.
Who Qualifies for the First Time Home Buyer Incentive?
To be eligible for the FTHBI, you must be considered a first time home buyer in Canada. You're considered a first-time homebuyer if you meet any one of the following criteria:
- You have never before purchased a home
- You have not lived in a home owned by you or your current spouse/common-law partner in the last 4 years
- You have recently gone through a breakdown of a marriage or common-law relationship
Other FTHBI Program Eligibility
In addition to qualifying as a first time home buyer, the following criteria will determine your eligibility for the First Time Home Buyer Incentive:
- Your annual qualifying income cannot exceed $120,000
- The total mortgage amount must not exceed 4X your annual income
- You or your spouse/partner must be considered a first time home buyer
- Must possess Canadian citizenship, permanent residency, or non-permanent resident able to work in Canada
- Your portion of the down payment must come from traditional sources ie. personal savings, RRSP, or a non-repayable gift from a family member
- Mortgage must be CMHC-eligible, and over 80% LTV
How Does the FTHBI Incentive Work?
Eligible home buyers can receive a loan for 5% of the purchase price of a resale home, or 10% of the purchase price of a new build. This lowers the overall mortgage amount, reducing the mortgagor's borrowing costs. Because the loan does not incur interest or have regular payments, the home buyer's cash flow is not impacted.
The Incentive must be repaid in full when the home is sold, or after 25 years, whichever comes first. The amount to be repaid will be 5% or 10% of the home's fair market value at that time. This is where the idea of "shared equity" comes in. If your home has increased in value, the amount repaid to the government will be higher than what was borrowed. If the home has decreased in value, it will be less.
Here's an example of how this could work:
Let's say you purchase a home this year for $300,000. It's a resale home, so the government provides a shared equity loan of $15,000 (5%). After 10 years, you sell the home for $400,000. Upon the sale, you will need to repay the government 5% of $400,000, which is $20,000.
Let's say your home decreased in value during that 10-year timespan, and you can only sell it for $250,000. You will still repay 5% of the fair market value, but that only equates to $12,500. In this case, the government is sharing in the downside risk of your home's equity.
First Time Home Buyer Incentive and New Construction
If you decide to purchase a newly built home, you have the option of applying for a 10% shared equity mortgage. That equates to $40,000 on a $400,000 purchase, which is enough to reduce monthly mortgage costs by $200-$300, especially when you account for other costs, like mortgage life or critical illness insurance.
Repaying a FTHBI
There are a number of situations that may require full repayment of the First Time Home Buyer Incentive. We've already covered when you sell your home, or after 25 years. Here are some other scenarios that might trigger a full repayment:
- Mortgage refinance (in some cases)
- Relationship breakdown, resulting in a buyout payout of the spouse/partner
- Upon the partial release of mortgage security
- Change in the intended property use (rental, investment property)
Before you enter into an agreement for a shared equity mortgage, you need to consider all of the above, not to mention the potential impact a sudden repayment would have on your finances. The home buyer can choose to pay off the loan early, without incurring a penalty.
Other Home Buyer Incentives
In addition to the FTHBI, first time home buyers should also consider another federal government program, the Home Buyer's Plan (HBP). It allows Canadians to borrow money from their RRSP to purchase a home. There are no tax implications, but the funds must be repaid to the RRSP over a 15 year period.
Should I Apply for the First Time Home Buyer Incentive?
Before applying for the FTHBI, it's important to consider all of the possible scenarios. Not everyone will be comfortable knowing that they will have to make a large lump sum repayment when they sell their home. Also, because the maximum mortgage amount is 4X the borrower's annual salary, it may be difficult to find a qualifying property if you live in an expensive housing market.
On the other hand, the First Time Home Buyer Incentive might be the difference in being able to afford a home. Either way, it's a step in the right direction for housing affordability in Canada, which is always a good thing.