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In September of 2019, the Canadian federal government launched a new program to assist homeownership hopefuls with the purchase of their first home. The First Time Home Buyer Incentive (FTHBI) offers eligible buyers up to 10 percent of the price of the home. Its purpose is to provide funds toward the down payment to lower the mortgage carrying costs.
The government is confident that FTHBI will become a vital tool in making home ownership more affordable for Canadians from all income levels and locations. Like most new initiatives, it includes some complicated details that are challenging for new buyers to decipher. Thankfully, experts in the financial and real estate sectors are supplying information to provide some clarity.
Initially, there was a lot of confusion about the qualifications for approval of the FTHBI. Buyers were not clear whether they would automatically be approved when they made their mortgage application. Others were confused about whether the program was free money that did not have to be repaid. And unfortunately, some buyers did not attempt to apply because they believed their situation fell outside of the parameters for approval.
Basic information homebuyers should know about the First Time Home Buyer Incentive:
Not all new buyers are eligible; there are specific requirements for first time buyers.
The Incentive is a type of loan from the Canadian government that eventually has to be repaid.
The benefit is not allocated in cash. It is a shared equity mortgage loan, which means the government shares profits and losses on the equity in the home.
This basic information gives buyers an idea of whether or not they would like to pursue the program. Deeper research reveals that buyers do not have to make monthly payments on the funding and they are not charged interest. The money is repaid when the home is sold or after twenty-five years, whichever comes sooner. But there are more requirements to get approval for this incentive.
The Initiative is not exclusive to first time buyers who have never owned a home. Divorced homeowners and people who haven’t lived in a home they owned for the previous four years are also eligible to apply. This rule also applies to people in common-law partnerships. There are other exceptions that make it worthwhile to get full clarity about program eligibility.
Among other mandatory FTHBI requirements:
The rules also include a maximum down payment of 20% of the home’s price. People who earn less money have less borrowing power; their approval amount is limited depending on income and other factors. Many people who live in large cities disapprove of the Incentive since the average cost of a home in Canada is over $505,000. But the consensus is that it provides a path to homeownership to people in small cities with lower income residents and cheaper home prices.
So how does the First Time Home Buyer Incentive shake out in dollars and cents? Under the incentive, the government loans buyers only 5 percent towards a down payment on a resale home and 10 percent for a new build. Using these numbers, possible scenarios would work out as follows:
Buyer #1
Buyer #1 purchases a new home for $600,000. She is approved for the FTHBI and gets a $60,000 loan from the government toward her down payment.
Buyer #2
Buyer #2 finds a lovely home that also costs 600,000. It was built five years ago in the same neighborhood as the first buyer’s home. His First Time Home Buyer Incentive loan is approved – but for $30,000.
What gives? Both properties cost the same and they are in the same neighborhood. Both buyers had pretty much the same down payment saved and credit scores. The first buyer received the full ten percent because the home was new. A larger down payment (whether its 10 or 5%) may decrease the monthly payment amount. But if the home increases in value, the buyer pays back more than borrowed. But if it decreases, the repayment amount is less than the original loan.
The price of the home and the economy also play a part in whether the program is appropriate for an individual. People who are simply unable to save an additional 5% down payment and decide to accept FTHBI loans should consider the following:
There is no penalty for early repayment of the First Time Home Buyer Incentive. A good financial strategy is to repay the loan prior to making home renovations that would increase the home’s value. Even if there are no renovations planned, early repayment limits paying back more money in the event of a huge increase in the equity of the home.
The amount owed is not based on the amount of money borrowed. Rather, it is the 5% or 10% share received; only it is calculated as the percentage of the fair market value of the home at the time of the sale or at the 25 year milestone. Again, FTHBI loans create a shared equity loan with the government of Canada. Therefore, any increase or decrease in the equity of a home benefits the government.
Challenges for first time home buyers in Canada have increased in the last five years. Rising costs of property, the rules of the mortgage rate stress test and multiple offer bids all help make entering the housing market more difficult. The intention of the First Time Home Buyer Incentive was to ease the stress of purchasing a first home. Both its advantages and disadvantages have been the subject of much discussion.
There’s no doubt that this government mortgage loan could save buyers mortgage interest over time. The FTHBI also makes homes more affordable for Canadian buyers. The funds from the Incentive can be just the boost that gives a new buyer enough money for a down payment on a decent home.
In essence, it means that the government owns a percentage of the home. Another disadvantage is that if the home is sold, the loan plus any increase in equity must be paid back to the government. Income caps, approval requirements, and other rules lead some to believe that the FTHBI is not a good option for a new home buyer.
Ultimately, it is up to the buyer to do all they can to make an informed decision for or against the program. The Incentive is relatively new; more will be known about its effectiveness as time goes on. In the meantime, the Incentive is under careful scrutiny by all parties concerned.
