In a June 2019 news release from the Canadian Mortgage and Housing Corporation (CMHC), details emerged regarding the first time home buyer incentive (FHBI) including the expected launch date. According to the news release, September 2nd was the kick-off date for the first-time homebuyer incentive with the first closing on November 1, 2019.
In this article, we will provide an overview of the FHBI as well as the costs and benefits, and highlight what this all means for a first-time homebuyer.
As first discussed in Kandice Henry’s article covering this topic, as part of the government’s Budget 2019 measures to help first time home buyers, the FHBI was introduced with the following features:
The FHBI would be eligible to first time home buyers who have a minimum down-payment of 5% for an insured mortgage with CMHC, Genworth, or Canada Guaranty. The FHBI can be obtained in the amount of 5% of the purchase price of a re-sale home or 10% of the purchase price of a newly constructed home. Here’s an example:
Suppose you wanted a newly constructed home worth $450,000. The CMHC or the other mortgage insurance companies listed above would require a minimum down payment of 5% of the cost of the home, which would be $22,500. With the FHBI, CMHC would contribute an additional 10% of the cost of the home—in this case, $45,000—thereby reducing your mortgage loan amount to $382,500 as opposed to $427,500. This would represent a savings of approximately $200 a month on mortgage payments using a standard 3% 5-year fixed mortgage with a 25-year amortization period. You can determine these savings by playing around with your bank’s mortgage calculator online.
The benefits of the FHBI are as follows:
- if you are a first-time homebuyer, you stand to gain from reduced monthly mortgage payments;
- with the FHBI being 10% for newly constructed homes compared to 5% for resale homes, there is an incentive for first-time homebuyers to purchase newly constructed homes, thereby fostering more new housing supply; and
- the FHBI does not require any on-going repayments by the borrower and is not interest bearing. This would be the equivalent to receiving a loan without any monthly obligations for repayment of interest or principal. The FHBI is repaid at the earlier of 25 years or when the property is sold. You can also choose to pay it back at any time without a pre-payment penalty.
Now let’s examine some of the costs or downsides of the FHBI.
- To qualify for the FHBI, your household income cannot be greater than $120,000 and the insured mortgage, including the incentive amount, cannot be greater than four times the participant’s qualified annual household income; and
- The government now has a 5 or 10% stake in your home and shares in the upside or downside in the value of your property. This means if you decide to renovate your property and the value increases as a result, CMHC would share in this increase.
To better understand the limitations of the FHBI, suppose you have a qualified annual household income of $95,000. This would mean that your mortgage, including the incentive, cannot be greater than $380,000. So, if you wanted a newly constructed home, the cost of the house cannot exceed $400,000. To make this clearer, suppose the cost of the newly constructed house is $400,000 and you pay the minimum down-payment of 5%, this reduces the mortgage amount to $380,000. The CHMC would then contribute 10%, or $40,000. Therefore, the insured mortgage would be $340,000. Including the incentive amount of $40,000 would bring the mortgage to $380,000.
What does all of this mean for you?
As a first-time homebuyer, you would need to weigh the benefits of lower monthly mortgage payments against the cost of paying back a portion of the future appreciation in the value of your property. If interest rates rise, your savings in monthly mortgage from taking advantage of the FHBI increase due to the lower mortgage payments. If the property value rises drastically, that means the higher the amount you will have to pay back to the CMHC.
Luckily, an entrepreneur by the name of Alex Leduc, through his startup called Mortgauge, has developed a calculator to help consumers assess the potential costs and benefits of the FHBI. The calculator will help you perform this cost/benefit analysis by prompting you to enter your desired down-payment amount and household income, amongst other important details. Head on over to the website and play with the numbers and decide whether the FHBI is beneficial for your personal situation. Also, let us know your thoughts in the comments section.