The new First Time Home Buyer’s Incentive (FTHBI) came into effect in September 2019. The program is aimed at making it easier for young people/eligible Canadians to buy their first home by lowering the monthly mortgage payments. The federal government agreed to a $1.25 billion CMHC First-Time Homebuyer Incentive over three years. It will provide 5% of the cost of an existing home up to a maximum of $500,000 and 10% of the price of a new home. While it sounds like the federal government is providing an interest-free loan, know that they also secure shared equity in your home as it goes through gains and losses. This means the amount paid back to the government will fluctuate based on how much your home increases or decreases in value.
There are a few notable conditions to watch out for;
- Applicants must have a down payment of at least 5% and no more than 20%. (CMHC insurance must apply)
- Household income must be less than $120,000
- The mortgage cannot be more than four times the homebuyers' household income.
For example, if you buy a $400,000 home with a minimum down payment of 5% ($20,000) you would be eligible to receive $40,000 for a newly constructed home through CMHC. As a result, instead of taking out a $380,000 mortgage, you will borrow $340,000. On a mortgage at 3.5% the monthly savings over the 25-year amortization period is more than $200.
- Applicants must not have owned a house in the last four years – exceptions will be made for those in a "breakdown of marriage or common-law partnership."
- The loan must also be paid back under two circumstances:
- if you sell your home;
- or at the end of 25 years
The current mortgage stress tests for both insured and conventional mortgages remain intact, however, as CREA states in their federal budget bulletin, “The government will continue to monitor the effects of its mortgage finance policies and adjust them if economic conditions warrant.”
In addition to the FTHBI the Liberal government also increased the amount first time buyers are allow to withdraw from their RRSP for a down payment. A $10,000 increase in the federal Home Buyers' Plan to allow a maximum withdrawal of $35,000 from one's RRSPs to put towards a down payment on a home. This allowable withdrawal for first-time buyers has also been extended to apply to Canadians after experiencing a marital breakdown in marriage or common-law partnership. The same repayment schedule applies with home buyers required to pay back their RRSPs over 15 years.
Frequently asked questions about the new incentive:
What properties are eligible?
The new incentive is to help first-time homebuyers/eligible Canadians purchase their first home. Eligible properties include: new construction, re-sale home and mobile/manufactured homes. The residential properties can include up to 4 units. The types of properties include: single family, semi-detached (i.e. side by side), duplex, triplex, fourplex, town houses, and condominium units. The property must be located in Canada and must be suitable and available for full-time, year-round occupancy.
Can I buy a house using the program and rent it out?
No. The incentive is to help first-time homebuyers/eligible Canadians purchase their first home with the intent to live the property. Investment properties are not eligible for the incentive.
What are the terms of repayment?
The homebuyer will be required to pay back the Incentive amount after 25 years or when the property is sold, whichever comes first. The homebuyer can also repay in full at any time, without a penalty. Refinancing of the first mortgage will not trigger repayment.
How is repayment calculated?
- If a buyer receives a 5%, the homebuyer will repay 5% of the home’s value at repayment.
- If a buyer receives a 10%, the homebuyer will repay 10% of the home’s value at repayment.
Repayment is based on the property’s fair market value at the point in time where repayment is required.
Are there other costs involved with the First-Time Homebuyer Incentive?
There may be some additional cost associated with the Incentive:
- Legal fees: Your lawyer is closing two mortgages so you may be charged higher fees.
- Appraisal fees: You may need to have an appraisal done to value determine the fair market value of your home when thinking about repaying the incentive.
- Other fees: Additional fees may be incurred throughout the life cycle of the incentive, like switching your first mortgage to a new lender or refinancing your first mortgage.
What are the mortgage details?
- The maximum threshold for debt service ratios are GDS 39% and TDS 44%. This is only applied on the first mortgage and is subject to requirements by lenders and mortgage loan insurers.
- Total borrowing is limited to 4 times the qualifying income. The combined mortgage and Incentive amount cannot exceed four times the total qualifying income. The amount for the mortgage loan insurance premium is excluded from this calculation.
- The Incentive is a second mortgage on the title of the property. There are no regular principal payments. It isn’t interest bearing and has a maximum term of 25 years.
- The Government of Canada will share in the upside and downside of the property value upon repayment.
Is Mortgage Loan Insurance required?
- The mortgage must be eligible for mortgage loan insurance through either CMHC, Genworth, or Canada Guaranty. The first mortgage must be greater than 80% of the value of the property and is subject to a mortgage loan insurance premium.
- The premium is based on the loan-to-value ratio of the first mortgage only. That is, the first mortgage amount divided by the purchase price. The Incentive amount is included with the total down payment.
- Mortgage loan insurance premiums may vary depending on the mortgage loan insurer and may be subject to provincial taxes.
Can I switch my first mortgage to a different financial institution?
Yes, your first mortgage may be switched to a different financial institution without having to repay the incentive. The terms of the first mortgage may not be altered in this case.
If I decide to purchase a new property, can I port (moving the mortgage to a new property) the Incentive along with my first mortgage?
A Port is considered to be a sale which will trigger repayment of the Incentive.
Do you have a question regarding the new home buyer’s incentive? Feel free to contact me, I’d be glad to answer any of your real estate questions.
Phone: (204) 470-5356