If you had the chance to make a bigger down payment on a house, would you take it?
That is the question we are going to answer today as the First-Time Home Buyer Incentive Plan (FTHBI) started taking program applications on September 2, 2019.
The allure for program applicants is the opportunity to make a bigger down payment than they could save for, thereby reducing their monthly mortgage payments. The following scenario assumes you’re buying a newly constructed $400,000 home with the minimum five percent down payment. The monthly payment works to $1,973. With the FTHBI plan contributing an additional $40,000, the monthly payment is reduced to $1,745; a monthly of savings of $228.*
But, with all things that look great on paper, there’s more to the program than simple monthly savings.
Are You Eligible For The First-Time Home Buyer Program?
The Canada Mortgage and Housing Corporation (CMHC), one of three Canadian mortgage insurance companies, has dedicated $1.25 billion over three years to the FTHBI plan. The primary criteria for the program are:
You are a first-time homebuyer;
You must live in the residence you’re purchasing, no investment properties;
Your down payment is less than ten percent and can only come from traditional sources;
Your mortgage must be insured;
Your maximum household qualifying income is $120,000 per year;
The maximum first mortgage is four times annual income, maxed out at $480,000;
The amount will be repaid at the sale or at the end of the mortgage based on the current market value of the home.
Before you start packing your bags, let’s unpack these requirements.
What is a First Time Home Buyer?
The program has defined a first-time homebuyer as:
Someone who has never purchased a home before;
Someone who has gone through a breakdown of a marriage or common-law partnership;
Someone who in the last four years, did not occupy a home that was occupied by the homeowner or their spouse.
Single-family homes, semi-detached homes, duplexes, triplexes, fourplexes, townhouses, mobile homes, and condominium units are all eligible for the program. The incentive amount will vary based on the age and type of residence. Five percent of the purchase price will be given for existing homes and new and existing mobile homes. Five or ten percent of the purchase price will be given for newly constructed homes.
Repaying the Incentive
The incentive amount is interest-free and can be repaid at any time without penalty. If you sell your home or reach the end of the amortization period (25 years), you are required to pay back the incentive.
The repayment amount is based on the home’s current market value. If the value of your home increased, possibly because of renovations or property values, you will have to repay the five or ten percent of the current value.
If your home has increased in value, you’ll pay more, taking from the profit of the sale after any appraisal and realtor fees. If your home’s value decreased, you’ll pay less but you may not be able to make the repayment after all other fees are accounted.
This leaves lingering questions. How do you repay the loan if you stay in your home for the 25 years? Or will you have to refinance your home to pay out your government partner?
We’re also worried that there’s not much clarity as to how the government will approve the sale of your home if you choose to move. Will they have the right to refuse a discounted sale of your home because you need to sell quickly?
Other Considerations About the FTHBIP
One thing we want to be really clear on; the FTHBI plan is just one avenue that first-time homebuyers should examine before purchasing a home. As with any mortgage option, the Incentive plan has its pros and cons.
Entering a Shared Equity Mortgage
A large consideration for us is that applicants enter into a shared equity mortgage (SEM) with the Canadian government. In this case, there are two mortgages on the property; one for you, and one for the government. This could create issues for getting a line of credit, buying out a spouse, or arguing about what your house is worth later on.
Qualifying for a Smaller Purchase
With the maximum qualifying amount of $480,000 on your mortgage, you will have to adjust your desire to get a bigger home.
In hot markets like Toronto or Vancouver finding a single-detached home under the maximum amount won’t happen. While the prices have fallen in the last two years, the average cost in Toronto for a single-detached home is $875,000 while Greater Vancouver is $995,200, according to the Canadian Real Estate Association (CREA). First time home buyers through this program will have to look outside of these areas or downsize to a condo or townhouse.
In Calgary or Edmonton, finding a single-detached home around or under this maximum amount is possible. In Calgary, the average for a single-detached home is $488,400, according to Calgary Real Estate Board (CREB) and $429,717 in Edmonton, according to CREA.
Is The First Time Home Buyer's Plan Worth It?
Are you ready for our favourite answer? It depends.
This plan really only addresses one aspect of the buying process; the down payment. It doesn’t outline the actual mortgage agreement, such as the type of interest rate, penalties, and more.
The tricky part for many Canadians will still be saving the required minimum five percent down payment, especially since these funds can only come from traditional methods such as savings, RRSPs, funds borrowed against assets, or a non-repayable gift from a relative.
With the maximum qualifying amount, buyers are also restricted with their purchasing power. Other options are available to you to qualify for a larger home without the FTHBIP.
But, here’s the bottom line. Jumping into the real estate market is the best way to increase your wealth. If you’re ready to buy your first home, then this program could be the right way to do it. And that’s where we come in. We love looking for the best solution that confidently gets you into your first (or second!) home.