The government on Monday released details of a program announced during the last federal budget, an initiative that could see Canada’s housing agency contribute up to 10 per cent of the price of a buyer’s first home if certain conditions are met.
Under the fine print for the First Time Home Buyer Incentive program, which was announced in March and will officially launch in September, a first-time homebuyer who earns less than $120,000 can qualify. The Canada Mortgage and Housing Corporation would kick it up to 10 per cent of the purchase price of the home, providing the borrower comes up with the minimum amount for an insured mortgage, which is now at five per cent.
There’s also a requirement that the total value of the mortgage plus the CMHC’s portion don’t eclipse $480,000. A government official says that effectively means the program is only available for properties worth a maximum of about $565,000, regardless of whether or not they have met the other requirements.
If that bar is met, the CMHC may kick in an additional five per cent of the purchase price of a resale home. For a newly built home, the CMHC may contribute up to 10 per cent.
The stakes from the CMHC would be interest free, meaning no ongoing cost to pay down, like a mortgage does.
But the government says in exchange for its stake, the CMHC would get to participate “in the upside and downside of the change in the property value” — which means they would be entitled to any corresponding increase in the value of a home when the buyer eventually sells. On the flip side, the government would also on the hook for any share of the loss if the property depreciates.
On a home costing $500,000, if the borrower puts up $25,000 and the CMHC puts up the same amount, the CMHC would then own five per cent of that home. So if, down the line, the house appreciates to $600,000 and the borrower wants to sell, they would have to give the CMHC five per cent of the sale price — $30,000 in this example — not the $25,000 the CMHC put down in the first place.
While a bill would be paid down the line, the savings over the years could add up. In the example above, the program would save a would-be borrower $286 a month in mortgage costs over the life of the loan, $3,430 a year.
“This will mean more money in the pockets of Canadians and will help up to an estimated 100,000 families across Canada,” said Jean-Yves Duclos, the Liberal MP and cabinet member in charge of the CMHC.
The program ultimately encourages first time home buyers to consider purchasing outside key markets in big cities as well as encouraging builders to continue to build more inventory in market outside the big cities.
The program must be paid back within 25 years — or if the buyer sells before that — but there’s no financial penalty for buying the CMHC out of its stake, at whatever the fair value of the home is at the time. Applications will be accepted as of Sept. 2 for home sales that will close no earlier than Nov. 1.
Funding for other programs too
In addition to offering these programs itself, the government has earmarked $100 million a year to help fund other organizations that already offer similar programs.
That’s a group that could include Toronto-based Options For Homes, which has worked with 3,000 homeowners over the last quarter century on a similar model — putting up money to help them become home purchasers, in exchange for a stake in the property down the line.
“[This] will go a long way to help to improve access to home ownership for middle-income earners and make progress in tackling affordability issues,” CEO Heather Tremain said.
“We’ve been using the shared equity mortgage model for more than 25 years and have seen first-hand the positive impact it can have on working Canadians looking to achieve the dream of home ownership.”
This @CMHC_ca chart shows some scenarios. While there may be “savings on monthly payment”, it’s more prudent to think of FTHBI “savings” more as payment deferment. You owe that money back to the government when you borrow new money against your home or sell it.
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive (the Incentive) helps qualified first-time homebuyers reduce their monthly mortgage carrying costs without adding to their financial burdens.
You need to have the minimum down payment to be eligible. You can then apply for a 5% or 10% shared equity mortgage with the Government of Canada. Your maximum qualifying income is no more than $120,000 and your total borrowing is limited to 4 times the qualifying income.
The Incentive has an equity-like payout, where the government would share in the upside and downside of the property value.
The First-Time Home Buyer Incentive launches September 2, 2019*.
* Barring any unforeseen circumstances the program will launch on September 2, 2019. The first closing will take effect on November 1, 2019.
How does it work?
The Incentive enables first-time homebuyers to reduce their monthly mortgage payment without increasing their down payment. The Incentive is not interest bearing and does not require ongoing repayments.
Through the First-Time Home Buyer Incentive, the Government of Canada will offer:
How do I know how much I have to pay back?
You can repay the Incentive at any time without a pre-payment penalty. You have to repay the Incentive after 25 years or if the property is sold. The repayment of the Incentive is based on the property’s fair market value:
- You receive a 5% incentive of the home’s purchase price of $200,000, or $10,000. If your home value increases to $300,000 your payback would be 5% of the current value or $15,000.
- You receive a 10% incentive of the home’s purchase price of $200,000, or $20,000 and your home value decreases to $150,000, your repayment value will be 10% of the current value or $15,000.
NOTE: If your property value goes down, you are still responsible for repaying the shared equity mortgage based on the current home value at time of repayment.
|Incentive by Property Type|
|PROPERTY TYPE||INCENTIVE (%)|
|New Construction||5% or 10%|
|New or re-sale mobile/manufactured home||5%|
The First-Time Home Buyer Incentive works on a first-come-first-serve basis. The total amount of funding will be $1.25 billion over 3 years.
Eligibility and Requirements:
Who can apply?
- Canadian citizens, permanent residents, and non-permanent residents who are legally authorized to work in Canada
- Borrowers must have a maximum qualifying income of $120,000
- Total qualifying income cannot exceed $120,000 per year
- This is subject to qualifying income requirements set out by lenders and mortgage loan insurers
- At least one borrower must be a first-time homebuyer, as per the definition below.
Are you a first-time homebuyer?
You are considered a first-time homebuyer if you meet one of following qualifications:
- you have 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
- IMPORTANT: With the 4-year clause, it is possible that you or your spouse or common-law partner qualifies for the first-time homebuyer incentive (if you are in a married or common-law relationship). Even if you or your spouse or common-law partner has previously owned a home in the last 4 years.
How does the 4-year period work?
- 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, 2015, 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
Are there other mortgage details?
- Total borrowing is limited to 4 times the qualifying income. The combined mortgage and Incentive amount cannot exceed four times the total qualifying income.
- The amount for the mortgage loan insurance premium is excluded from this calculation.
- The Incentive will be a second mortgage on the title of the property. There will be no regular principal payments, it’s not interest bearing and has a maximum term of 25 years.
- The Incentive will have an equity-like payout, where the Government of Canada will share in the upside and downside of the property value upon repayment.
Is Mortgage Loan Insurance required?
- Mortgages must be eligible for mortgage loan insurance. The first mortgage must be greater than 80% of the value of the property. This is subject to a mortgage loan insurance premium based upon the amount of the first mortgage.
- Mortgage loan insurance premiums may be subject to provincial taxes.
What are the down payment requirements?
- Minimum down payment is 5% of the first $500,000 of the lending value. It is 10% of the lending value above $500,000 from traditional down payment sources.
- Traditional down payment comes from the borrower’s own resources and may include:
- withdrawal/collapse of a registered retirement savings plan (RRSP)
- non-repayable financial gift from a relative
- Note: Unsecured personal loans or unsecured lines of credit used to satisfy minimum down payment requirements are not eligible for the program.
What properties are eligible?
The Incentive is to help first-time homebuyers purchase their first home. Eligible properties include:
- 1 to 4 unit residential properties which includes
- new construction
- re-sale home
- new and re-sale mobile/manufactured homes
- The property must be located in Canada and must be suitable and available for full-time, year-round occupancy.
What are the terms of repayment?
- The first-time homebuyer will be required to repay the Incentive amount after 25 years or when the property is sold, whichever comes first. The homebuyer can also choose to repay the Incentive in full at any time, without a pre-payment penalty.
How is repayment calculated?
- If a homebuyer receives a 5% (or 10%) Incentive, he would repay 5% (or 10%) of the home’s value at repayment.
- Repayment is based on the property’s fair market value.
Let’s look at a specific situation & EXAMPLES
Anita wants to buy a 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) through the program. This is on top of the minimum required down payment of $20,000 (5% of the purchase price) from her savings.
This lowers the amount she needs to borrow and reduces her monthly expenses.
As a result, Anita’s mortgage is $228 less a month or $2,736 a year.
* This example is for illustrative purposes only. Anita will need to repay the incentive at 10% of the fair market value when she sells the property or after 25 years, whichever is earliest.
Here’s another situation
John has an annual qualifying income of $83,125.
To be eligible for Canada’s First-Time Home Buyer Incentive, he can purchase a home up to $350,000. John still has the required minimum down payment of 5% of the purchase price, $17,500 from his savings. He can receive $35,000 in a shared equity mortage — 10% of a newly constructed home.
This would reduce John’s mortgage payments by $200 a month or $2,401 a year.
* This example is for illustrative purposes only. John will need to repay the incentive at 10% of the fair market value when he sells the property or after 25 years, whichever is earliest.