Is the new First Time Home Buyer Incentive worth it?

Have you heard about the new First Time Homebuyer Incentive offered by the Government which came into effect in September?  As part of the National Housing Strategy, the aim is to assist first-time homebuyers by increasing their down payment and therefore decreasing their monthly mortgage payments.

If you meet the criteria set out for the program (see further), you can receive 5% of the purchase price of an existing home or 10% of a new home, interest and payment-free to help towards the purchase of your new home which can help you qualify for a mortgage and will lower your monthly payments.

Are you considered a First Time Home-buyer?

You are considered a first-time home-buyer if you meet one of the following criteria:

  1.  you have never purchased a home before
  2. you've recently experienced a breakdown of a marriage or common-law partnership
  3. in the last four years, you did not occupy a home that you and your current spouse or common-law partner owned

Qualification Criteria

  1.  Minimum down payment.  You still need to provide a minimum of 5% of your own funds as a down payment on the purchase.  This must come from traditional sources such as savings, non-repayable gift, etc.
  2. Maximum Qualifying Income cannot be higher than $120,000 per year (per household).
  3. The total borrowings cannot exceed 4 times your qualifying income.

Assuming you make the maximum household income allowed for the program ($120,000 a year) and are purchasing a re-sale home, the highest purchase price you are eligible for is $505,000 (rounded for simplicity).  Let's look at an example:

Purchase of a $500,000 re-sale home
Downpayment Required (5%)  $   25,000.00
CMHC Premium  $   19,000.00
Total Mortgage  $494,000.00
Monthly payment  $     2,259.97
With new Incentive
Downpayment Required (5%)  $   25,000.00
Funds from Incentive  $   25,000.00
CMHC Premium  $   13,950.00
Total Mortgage  $463,950.00
Monthly payment  $     2,122.49

The addition of the incentive will save you $137.48 a month which will add up to $8,248.80 over five years.  It has also saved you $5,050.00 in premiums as you are borrowing at 90% of the home's value, not 95%.

Considerations

This program gives the insurer (CMHC or Genworth) equity in your home... if the value of your home increases, so does the amount you will have to pay back when the time comes.

The insurer will register a lien against your property.

This program is only for homes that will be occupied by you as the owner.

You may be subject to additional costs with this program such as:

  • higher legal fees at purchase as your lawyer has to register two mortgages instead of one
  • additional legal fees if you choose to switch your mortgage to another lender during the term or at renewal as there is the additional lien to consider
  • appraisal fees if you decide to repay the incentive during the term as the repayment will be based on your home's current market value.

The maximum amount that is eligible for the program won't help home-buyers in some of the bigger markets such as Toronto or Vancouver where housing prices are much higher.  **with the upcoming election, there has been talk of increasing the eligible amount in these markets, more will be known after October 21st.

When do you have to pay the incentive back?

  • when you sell your home
  • 25 years after obtaining the incentive
  • if you refinance your mortgage, either with your existing lender or a new one

You may choose to pay back the incentive at any time, however as noted above, additional fees may be incurred.

Is this program worthwhile?

In my opinion, the First Time Homebuyers Incentive program can be of help to first-time homebuyers in a limited capacity but I do feel that the program is cumbersome, complicated and not the best way the government could have chosen to assist.

Although the stress test rate was recently reduced from 5.34% to 5.19%, a larger reduction would have assisted homebuyers much more for qualification purposes.  Increasing the amortization allowable for insured mortgages back to 30 years from the existing 25 also would have made much more of an impact on the number of qualified borrowers.

I personally would prefer to see one of the two options above adopted as opposed to a program that basically gives the government partial ownership in my home and I believe many homeowners feel the same.

For more information about this program, visit the Government's website at:  https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive

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