Michael’s Corner – Episode 3 – First Time Home Buyers Incentive Program

Educating & empowering you with the Hints, Tips, Tricks, & Insights to the real estate world! Always make sure you have someone looking out for your best interests!

Overview

• The Government of Canada (“GOC”) has launched its new First Time Home Buyers Incentive program to assist with the monthly cost of carrying a mortgage for first time home buyers.
• The GOC is budgeting to fund $1.25B over the next 3 years.
• A first-time home buyer can be eligible for up to 10% of the purchase price to put towards the down payment to lower the monthly cost with no interest and no set principal repayment terms.
• There are lots of details on this, but we’ll cover the basics and provide some links to the government website with all the details below (including a calculator to see how much you are eligible for and up to what purchase price).

Basic Eligibility

• The person purchasing the home must be a first-time homebuyer (some exceptions to this rule).
• A minimum down payment of 5% is required.
• The maximum qualifying income cannot exceed $120,000 (this includes annual salary, investment, and rental income).
• Your total borrowing cannot exceed 4 times your qualifying income (so the maximum purchase price under this program is $500,000).
• The GOC will offer either a 5% or 10% incentive (depending on whether the home is a new build (5% or 10%) or resale home (5%)).

How it works

• Let’s say you are a first-time buyer:
  • Your qualifying income is $100,000 resulting in a maximum purchase price is $400,000 ($100,000 x 4).
  • You have $20,000 saved for a down payment (5%).

In theory, you would be eligible for a 5% shared equity mortgage from the government (an additional $20,000 down payment on the home).

• The money from the government is registered on title as a second mortgage however it has no interest and no regular principal repayment terms.
  • The mortgage is due after 25 years or when you sell your home (whichever comes first).
  • You can pre-pay at any time without penalty.
• When you repay the shared equity mortgage, the amount due is based on the fair market value of your home at that time:
  • If the property value at the time you are repaying is $450,000, you would have to repay 5% of $450,000 (or $22,500).
  • If the property value at the time you are repaying is $350,000, you would have to repay 5% of $350,000 (or $17,500).

The Details

• You must be a Canadian citizen, permanent resident or non-permanent resident but are authorized to work in the country.
• The home must be in Canada and you must be able to live it in full-time, all year-round.
• It must be your principal residence (you must live in it).
• There are some restrictions on what the debt service ratios can look like (please refer to the links below for specifics on these).
• The mortgage must be eligible for CMHC or Genworth insurance.
• The loan-to-value ratio must be above 80% (meaning if you put down a 20% down payment, you would not be eligible for this program or, on a new build, if you put down 10% you would only qualify for the 5% incentive on new builds).

Potential Drawbacks

• Longer approval times – It could take a significantly longer time to gain approval under this program. Sellers maybe not be willing, or able to accommodate this.
• Higher legal and appraisal costs – with two separate mortgages having to be papered and registered (one for the equity share mortgage and one for the lender). In addition, when it is time to pay out the equity share mortgage, an extra appraisal will have to be completed (at the cost of the owner) to determine the fair market value at that time.
• A disincentive to improve/renovate the property could exist. Any renovations or improvements to the home that result in an increase in property value means that increase must be shared with the government.
• A potential trap is being created for non-permanent residents who are legally authorized to work in Canada who can qualify to buy under this program but will have extreme difficulty in selling when their work permit expires as they will not have sufficient equity to satisfy the required withholding requirements under the Income Tax Act.
• Refinancing could prove to be difficult – it is not clear whether the government will allow refinancing of the first mortgage and postpone their security to the new financing.
• If refinancing of the first mortgage is not permitted without first paying out the government’s equity share, the first mortgage lender will have a captive borrower.  The lender will have no incentive to reduce posted mortgage rates as they know you are unable to refinance the mortgage.

Calculator: https://www.placetocallhome.ca/fthbi/eligibility-savings-calculator

More Information: https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive

I do hope you found all that informative. If you’ve made it this far, please be sure to leave a like on the video and comment below on topics you would like to see in the future. We keep a close eye on these so if there’s anything you want us to cover and break down for you, comment below and we’ll absolutely do our best to get to that in the future! I hope you have a great rest of your day and always make sure you have somebody looking out for your interests. Bye for now.

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