By Peter Squire
In the March federal budget, REALTORS® from across the country were pleased that their effort to advocate for changes to the long-standing and successful Home Buyers’ Plan (HBP) were made.
The changes to the HBP were very much in keeping with what the Canadian Real Estate Association (CREA) had originally called for, with increases in the allowable RRSP limit from $25,000 to $35,000 to put towards your down payment (which must be paid back within 15 years), and extension of its eligibility to Canadians going through a marital or common-law split. The latter change is a win for CREA, since they were very effective in pointing out to federal MPs that significant life changes can bring about unexpected hardships. If you’re a couple who owns your own home, and you separate or divorce, you most likely want to replicate the continuity of that situation for your children by moving into another house.
Both of these changes were made effective immediately, so they are available now for eligible buyers to take full advantage of when buying a home.
Another program which was unveiled at the March federal budget is called a First Time Home Buyer Incentive (FTHBI). The $1.25 billion dollars allocated to this program over three years will not be released until November 2019, however, those interested in the FTHBI — if they qualify — can submit their application to Canadian Mortgage and Housing Corporation (CMHC) as early as September 2, 2019.
The key questions to ask yourself are whether you qualify to use this incentive if you so choose, and what in your own present financial circumstances makes most sense in availing yourself of this new opportunity.
The FTHBI is what some consider another tool to take out of your first-time home buyer tool box. The HBP is certainly one of the main tools, as nearly 3 million Canadians since 1992 have used it to purchase their first home. Another first-time home buyer benefit is the First Time Home Buyer Tax Credit, which provides up to $750 in federal income tax relief. The HBP was introduced in 2009, and is something that CREA has called for increasing to help Canadians with all the costs involved in owning a first home.
So what is the FTHBI and how does it work? It is a shared equity program where the federal government — through CMHC — takes an ownership stake in your first home through providing an interest-free payment of 5% of the mortgage for an existing home, and 5 or 10% of the mortgage for a newly constructed home.
There are a number of criteria which will limit the extent of what can be provided and who qualifies. Your income ceiling or maximum qualifying income needs to be $120,000 per year, and at least one borrower on the mortgage must be a first-time buyer. As mentioned above, the new addition of Canadians eligible for the HBP if they have ended a marriage or common-law relationship also applies to the FTHBI. The total mortgage amount cannot exceed four times your qualifying income.
The way this new incentive is being touted is that it offers you a way of lowering your monthly payments since you have a portion of your mortgage interest-free and also insurance premium-free. It does not require any monthly payments and does not have to be paid back until 25 years later or, which is more likely, when you sell your home prior to that time period. It also can be paid back at any time without a pre-payment penalty.
There is a catch, however. The shared equity program means CMHC will not only require you to repay the 5% or 10% of the original equity amount provided, but will also require you to pay them the same percentage gain in price that you may have achieved over the period you have owned the home.
In simplest terms, if you receive a 5% share equity loan of a $200,000 priced home, or $10,000, when you sell it years later for $300,000, you will owe CMHC a total of $15,000. The same percentage of your equity share applies to the sold price whether you have a gain or loss. Therefore, it is possible for you to pay back CMHC less than what they provided you if you take a loss on your home. Essentially, the government is sharing in the upside or downside of your property value.
Speaking of insurance, this program does not allow a first mortgage to be conventional or uninsured at 80% or less. So if you buy a newly constructed home — and receive a 10% equity share from CMHC — your down payment can be no greater than 9.99% and you will then pay the premium insurance rate based on that amount. The minimum down payment is 5% of the first $500,000 of lending value.
One criticism leveled at the new FTHBI by mortgage brokers is that it limits what you can qualify for at four times the buyer’s qualifying income. Whereas with current mortgage rules, you can qualify for up to 4.7 times a buyer’s income. This then begs the question, if you can afford a higher-priced home, do you want or need the government to take an equity share position in your home? Another point made by CREA’s CEO, Michael Bourque, is that if you are planning to do major renovations to a home you have purchased, you are better off paying off your shared equity loan first as you will be adding significant value to your home of which the government will capture in the shared equity gain.
Concerns over this program becoming an accelerator for house prices is not a real factor in the Winnipeg Metro Region, since there is a really healthy supply of houses and condominiums to choose from. There are also many listings available that are priced up to the limit set by only allowing a buyer to purchase a home no greater than 4 times a maximum qualifying income of $120,000.
More details on the FTHBI, and how it works in different situations, can be found at Canadian Mortgage and Housing Corporation’s website (www.cmhc-schl.gc.ca).
You are best to talk to your mortgage broker and/or financial institution to have them work through the numbers so they can give you professional advice on whether or not this new FTHBI will serve you well in buying your first home.
CREA will continue to advocate for policies and programs to support first-time home buyers across the country, helping to ensure all Canadians have the ability to become home owners.
Peter Squire is WinnipegREALTORS®, Vice-President, External Relations & Market Intelligence.