The dawn of 2021 has left many of us revisiting financial and lifestyle decisions made before the global pandemic threw the entire world into disarray.
Looking back to September 2019, first-time buyers had reason to feel optimistic. September 2, 2019, marked the launch of the Canadian Mortgage and Housing Corporation’s all-new First-Time Home Buyers Incentive (FTHBI).
Certainly, people who were in the rent versus buy debate were offered a powerful financial incentive to take the leap into homeownership. As we are painfully aware, however, the only constant in life is change.
So, we’d like to further explore the nuts and bolts of the FTHBI and determine together if this is the right decision for you.
What Is the First-Time Home Buyer Incentive?
The First-Time Home Buyer Incentive (FTHBI) is a government initiative designed to assist first-time buyers in Canada to enter the property market. The program offers 5 or 10% of the purchase price of the property funded by the Government of Canada as a shared equity mortgage.
This financial assistance is given as a down-payment alongside your own deposit which serves to lower your monthly mortgage repayments. It allows first-time buyers a start on the property ladder with a lower down-payment and affordable monthly costs.
“The First Time Home Buyer Incentive will reduce the monthly mortgage for your first home by up to $286,” says Jean-Yves Duclos, Minister of Families, Children and Social Development and Minister Responsible for Canada Mortgage and Housing Corporation. “This will help up to 100,000 families across Canada to buy their first home.”
The Financial Impact of the FTHBI
Let’s look at the financial impact the FTHBI would have on a family buying a $200,000 and a $500,000 home.
With a 5% or $10,000 ($20,000 total with FTHBI) down payment on a $200,000 home, the buyers will save $114 a month or $1,372 a year. If they put $25,000 down ($50,000 with FTHBI) on a $500,000 home, they’ll reduce their monthly payments by $286 a month or $3,430 annually.
Image source – Newswire.ca
“CMBA is in favor of the FTHBI because by sharing equity with the government, first-time homebuyers in specific segments are able to reduce the cash required for their weekly or monthly payments,” says Vancouver-based Rob Regan-Pollock, senior mortgage broker, Invis Inc., and co-chair of the Canadian Mortgage Brokers Association.
“It’s another tool in the quiver for mortgage brokers and agents that are helping first-time homebuyers earning less than $120,000 annually get into markets where they can purchase a home for under $500,000.”
So far, this looks like an exciting option.
Who Qualifies as a First-Time Home Buyer in Canada?
While we can assume from the name of the incentive that the qualifying criteria are for people who have never purchased a home before, other considerations may allow you to qualify for the FTHBI.
For example, you may qualify if you have experienced a breakdown of a marriage or a common-law partnership and you wish to purchase a home in your own capacity. Alternatively, if you and your spouse/partner own a property but you have not occupied it within the last four years, then you may also qualify.
If you fall within these parameters, then you’re off to a great start. What follows?
Do I Qualify for the First Time Home Buyer Incentive?
The following factors are considered before application:
A combined household income of less than $120,000 per annum
The insured mortgage and incentive cannot be more than four times the participants’ qualified annual household income
Either you or your partner is a first-time buyer
You are a Canadian citizen or permanent resident, or you are authorized to work in Canada as a non-permanent resident
You meet the minimum requirements for down payments in the form of savings or withdrawal/collapse of a Registered Retirement Savings Plan (RRSP), or as a gift from a relative or member of your family
In addition, homebuyers will still have to pass the B-20 stress test and have mortgage pre-approval and mortgage approval.
This is great news for people who have been wanting to buy a property but simply don’t earn enough to both save for a down payment and then manage to afford costly mortgage repayments.
For years now, unaffordable, astronomical properties have been getting all of the attention which can be daunting when looking for homes for sale.
In reality, those homes co-exist with some reasonably priced, affordable homes in the very same cities, including Toronto, Montreal, and Vancouver. Of course, those homes may be smaller apartments, older homes, and/or in less desirable neighborhoods, but they’re out there and may be perfectly suited to first-time buyers and their families.
If you’ve checked all the boxes, then you likely want to understand exactly how the FTHBI works and what the advantages and disadvantages are.
What to Consider Before Getting the First Time Home Buyer Incentive
An interest-free loan that reduces your down payments and monthly mortgage payments is certainly a major plus.
Other important points to note are:
The incentive is 5% on a resale or existing home
The incentive can be either 5% or 10% on a newly constructed home
No payments are due on the incentive until the home is sold or at 25 years
The incentive can be repaid in full at any time without penalties
The incentive must be repaid after 25 years, or when the property is sold, whichever comes first
The property is for you and your family to live in and suitable for year-round occupancy
The FTHBI is, essentially, a second mortgage on your home. This comes with other considerations that must be factored in before you decide to apply.
Once approved, you may be charged higher legal fees as your lawyer will be dealing with two mortgages.
Likewise, you may be liable for higher property insurance premiums due to the second mortgage.
At 25 years or resale, you will repay 5 or 10% of the home’s value at that time rather than the amount received from CMHC
If the home lost value, the owner and CMHC share the loss, and conversely, both parties benefit if the home increased in value.
Repayment must be in a lump sum of the current % valuation of the home
At 25 years or when selling, you may incur appraisal fees to determine the market value of your property
There are additional factors that may trigger repayment of the FTHBI. These are:
Switching mortgage providers
Partial release of security
Change of the intended use of the property
A breakdown of your relationship and you would like to buy out the other party
How do I Apply for the FTHBI?
So, you’ve determined that you qualify as a first-time home buyer and that you’re eligible - what happens next?
By this point, you’ve likely been looking at homes for sale in the area of your choice and have a property in mind.
Your real estate broker can guide you through the mortgage approval process, and you will have to complete two forms to apply for the First-Time Home Buyers Incentive.
These can be given to your lender or your real estate broker to submit on your behalf and the process can begin, finding you in your new home in no time at all.
The property market is a changing landscape, and especially now with the inestimable impact of COVID. It’s worth doing a little homework on the effects of the pandemic on the Canadian housing market and exploring the various options that have opened up to first-time home buyers.
For example, the article above relates, “Big-city living has lost some of its luster with social distancing measures severely restricting cultural life and socializing opportunities. Working and studying from home is now a reality for many, further eroding the attachment to big cities. Meantime, affordability issues are driving many Canadians further afield into smaller towns and cottage countries, where larger living spaces are available.”
Could this situation benefit first-time buyers who may not have been able to afford city living in the recent past?
More good news? “With the Bank of Canada’s overnight rate cut to close to zero and sharp declines in bond yields mortgage rates have been pushed to their lowest levels on record.”
Undoubtedly, it’s never been more affordable to own a home.
Now that you know exactly how the FTHBI could help you achieve your dream of homeownership; you can start planning your future to take advantage of the staggeringly low fixed rate interest and softer markets in various regions of Canada.
How much money can I save with the FTHBI?
There are several variables to consider, but a good start would be to look at a First-Time Home Buyers Incentive calculator and plug in your details.
How much does the government give first-time homebuyers?
Qualifying buyers can receive 5% on the value of an existing home, or 5 – 10% on the value of a new build.
How much do first time home buyers have to put down?
The minimum down payment required is 5% of the purchase price for the first $500,000 and 10% for any amount exceeding that. The FTHBI amount can make up any shortfall of this minimum requirement, but the total down payment cannot exceed 20% of the current value of the property.
Can I buy a house with no savings?
No, you will need to contribute to the minimum down payment on the property. Chat with your real estate broker to establish what this would be.
Can I make payments towards the FTHBI during my mortgage term?
The FTHBI can be repaid early during your mortgage, but it will need to be paid in full and no penalties are levied for early payment.
What is a shared equity mortgage?
A shared equity mortgage is where you take a smaller mortgage, in exchange for your lender owning some equity in the home. You'll become a co-owner of the property alongside your bank lender. You both share in the profits if the property value increased, and likewise share in the losses if it devalues.
Why does the repayment amount of FTHBI differ from the initial amount borrowed?
The initial payment received when you are buying is based on the current value of the property. At 25 years or when the property is sold, its value is reassessed, and the agreed percentage calculated on the current market value.