First-time buyers of new homes get more of an incentive

Details regarding the federal government's First-Time Home Buyer Incentive (FTBIP) program were announced recently, and it seems there's more on the table for first-time buyers of new builds than for Canadians considering the purchase of resale residences.

The program, which will take effect on September 2, 2019, is designed to help Canadians with incomes of up $120,000 buy their first home by reducing their monthly mortgage payments without having to increase the amount money they put down. The bonus for purchasers of newly constructed homes is an incentive amount of 10 per cent may be available while the incentive for resale purchasers is set at five per cent.

“A potential additional benefit to the purchase would be the reduction in the tiered CMHC insurance premium that would have to be paid," said Tom Gasparec, a mortgage agent with The Mortgage Centre. "With only five per cent down coming from the buyer, the CMHC insurance premium added to the mortgage would be four per cent. On a $500K purchase price that equals $20,000. If the buyer uses the FTBIP on a new construction purchase with the FTBIP kicking in an extra 10 per cent down for a total of 15 per cent down payment, the CMHC insurance premium is reduced to 2.80 per cent which equals $14,000 instead of $20,000. This gives the buyer and FTBIP a shared savings of $6,000 on the total mortgage amount required."

How does the FTBIP program work? Read on.

Like all loans, the First-Time Home Buyer Incentive needs to be paid back eventually. In this case, the incentive can be paid back in full at any time without no penalty or you can choose not to pay anything back for 25 years or after the property is sold, whichever occurs first. The amount of the incentive that needs to be paid back is calculated using the property’s fair market value at the time of repayment. The incentive is to be repaid whether the property value increases or decreases. No interest is accumulated on the incentive.

“Buyers utilizing the program ideally should be in frequent communication with their mortgage professional to determine at the earliest point that a refinance would be possible to payout the FTBIP," said Gasparec. "Assuming a 10 per cent annual appreciation our estimation shows that their would be sufficient equity to payout the 10 per cent incentive shortly after year two of owning the home. This strategy would provide the buyer with optimal return on investment utilizing the program."

Example of a new-condo purchase:

Melanie has an annual qualifying income of $90,000.

To be eligible for the First-Time Home Buyer Incentive, she can purchase condominium unit up to $350,000. She has the required minimum down payment of five per cent of the purchase price, $17,500 from savings.

Melanie can receive $35,000 in a shared equity mortgage (the incentive) which is 10 per cent of the price of her a newly constructed home.

This would reduce Melanie's mortgage payments by $200 a month or $2,401 a year.

If Melanie decided to sell the condominium and it is now worth $320,000, she will have to repay the 10 per cent incentive as a percentage of the home’s current value which in this case would be $32,000 at the time of selling the house.

More facts on the program:

• Canada's First-Time Home Buyer Incentive will help qualified first-time homebuyers purchase their first home as the incentive reduces their monthly mortgage payment, without increasing the amount that they must save for a down payment. The program will launch on September 2, 2019, with the first closing on November 1, 2019.
• The incentive will allow eligible first-time homebuyers who have the minimum down payment for an insured mortgage with CMHC, Genworth or Canada Guaranty, to apply to finance a portion of their home purchase through a form of shared equity mortgage with the Government of Canada.
• No on-going repayments are required, the incentive is not interest bearing, and the borrower can repay the incentive at any time without a pre-payment penalty.
• The government shares in the upside and downside of the change in the property value.
• The buyer must repay the incentive after 25 years, or if the property is sold.
• The incentive will be available to first-time homebuyers with qualified annual household incomes up to $120,000. At the same time, a participant's insured mortgage and the incentive amount cannot be greater than four times the participant's qualified annual household income.
• For a family buying a $500,000 home, this program could save them as much as $286 per month or more than $3,430 a year (note: for illustration purposes only, results subject to change depending upon amortization, interest rate, term, etc.).

"The First Time Home-Buyer Incentive is designed to benefit those who need more assistance with housing costs, middle class Canadians," said Jennifer O'Connell, Parliamentary Secretary to the Minister of Finance (Youth Economic Opportunity) in a press release. "Thanks to mortgage payments that are more affordable, many families will have hundreds of dollars more each month in their pockets – money to spend on things like healthy food, sports activities for their kids, or even save for the future."

The program is a complement to another first-time homebuyers incentive change with made earlier this year which increased the RRSP withdrawal limit from $25,000 to $35,000. All in all, the program may help lower mortgage payments, but not the cost of a home in hot markets, says Gasparec. "The FTBIP program does not resolve the supply/demand issue, it will only exacerbates Canada’s overheated housing market as it makes buying homes easier for Canadians which drive prices up," he said.

To read more about Canada's National Housing Strategy, visit www.placetocallhome.ca