There has been a lot of articles and gray areas around the provision of new First Time Home Buyer Incentive (FTHBI), which is a federal program and has been launched in Canada on Sep 2nd, 2019.
Let’s review when and where this program applies and get a real understanding of this first time home buyer incentive. Also, towards the end, we will consider whether it is a good option to exercise.
The first thing we need to understand that this is a kind of loan from the government; this loan needs to be repaid back in 25 years or when you are ready to sell your home, whichever comes earlier.
It is a shared-equity mortgage where the government puts a second mortgage on the title of the property and gives you 5% to 10% of the price of the resale or newly constructed home you are planning to purchase. This loan bears no interest and can be paid at any time without penalties by evaluating the fair market value of the house by a qualified appraiser.
Since, it is a shared-equity mortgage; the government needs to be paid back at the time of selling at the fair-market value proportion of their interest in the mortgage. So, if you took 5% from the government as an incentive at the time of purchase, you would need to give
5% back at the time of selling. Likewise, if the market takes a downturn, and if the property goes down in value, you need to pay back the lower proportion of the selling value proportionately. So, in this case, the repayment amount will be less than the borrowed figure.
Let’s evaluate the eligibility criteria for this incentive:
1) Needs to be your first home purchase in Canada to avail of this incentive.
2) Your combined family income should be less than $120,000.
3) The lending for the home is capped at four times the family income, so maximum borrowing could be $480,000, you can add your downpayment to this for the final purchase price.
4) Your first mortgage (or bank loan) must be higher than 80% of the purchase price; in other terms, it must be an insured mortgage from CMHC or Genworth.
5) The home must be your primary residence and cannot be an investment property.
The benefit this program has is that it will lower your monthly mortgage amount for the contribution amount made by the government.
Let’s take a simple example with numbers to understand better; suppose we are eligible as a buyer, and we take a 5% incentive with the purchase price of the property being $400,000. We receive $20,000 from the government towards our purchase.
Let’s fast forward 20 years, and if we are selling this property and its sold at $550,000, we need to pay back the government $27,500, which is 5% of the contribution they originally made.
The incentive works if you want to lower your monthly mortgage amount by a small factor, the downside is you need to share the growth of the property at the time of selling. If you can afford the monthly expenses, this might not be the right program for you. The other benefit of the incentive is that it will increase your purchase price, which could help to buy a better property.
This incentive does not work in the cases where you are capable of putting a 20% downpayment and are avoiding CMHC premium. Lowering your contribution to less than 15% to avail the incentive would defeat the purpose as you would be paying the CMHC premium in this case.
I hope you found this useful, refer to other such informative blogs here.
You can call our team if you have any specific questions on Real Estate, and we will be happy to discuss it.