Updated: Nov 30, 2019
Karchanechi is a Principal at Interchange Financial Corporation. On the heels of the most recent federal election, he is one of many people beginning to dive deeper into the promises made by the Liberals.
One of those promises is the First-Time Home Buyer’s Incentive which has already undergone some scrutiny. So just what is it, how does it help and how, if at all does it hinder first-time buyers from enjoying their dream of homeownership?
Up to 10% of the Purchase Price
The program is designed to help young Canadians get a foothold on what has become a more and more evasive first rung of the housing market. In theory, it sounds great. First-time homebuyers can get from five to 10% of their home’s purchase price from the government. It is what is called a "shared equity mortgage."
No interest payments required on the incentive amount
Available for families who make no more than $120,000 per year
Not so good news:
The government will take back the same percentage of the value of the home when it is sold
Total borrowing must not be more than four times the buyer’s income
Another downside is that the program limits participation to homes valued below $560,000. Depending on where you live, this doesn’t get you much, especially for areas like Toronto and Vancouver. However, Trudeau did announce they plan to expand the program so it will raise the home value to $789,000 in these key higher-priced cities.
Dollars and Sense
So how does this look on paper? If you earn $100,000 a year and have a down payment of $25,000, you can purchase a home valued at $425,000 with the assistance of the program. You’ll get up to $42,500 toward your down payment from the government which could save you about $230 per month at current market rates for your mortgage payments each month. That sounds good until you want to sell your home that is.
At the time of the sale, the government will get the same percentage on the current value of your home. In most cases, this will be higher than what you paid as real estate tends to rise in value, even in short periods of time. So, on your home that was worth $425,000 when you purchased it and where the government provided you $42,500 if the home is now worth $500,000 you would then have to give them back $50,000. Not as great a deal as it first sounded.
While you enjoy seeing the value of your home rise, you also have made payments monthly for your mortgage, invested money for general upkeep, or maybe even invested more for renovations. Meanwhile, the government has done nothing more than providing you with a limited amount of money upfront, yet they will still get what some might find to be a sizable amount for doing nothing. The money earned from the sale of your primary home is tax-free and one of the few ways you can make some good money on the appreciation of such an investment. Having to give up to 10 percent of your equity to the government eats into your profits.
While homeowners might be viewing this as an opportunity, there are flaws that make it something that should be examined with perhaps a finer toothed comb. Many will say the homeowner will lose in the end, while the government ends up on the upside of the equity, with very little put upfront.
As the homeowner, you could lose what you invested via your down payment based on even a slight decline in your home’s value. Meanwhile, you still have to pay the government back. Mind you the new amount repaid will be based on the lower value of the home. It works both ways in that you owe 10 percent regardless of the home’s value staying the same, rising or falling. However, when you do the math, even a 6% drop in the value of your home would see you lose all the equity of your down payment.
No Interest on The Incentive Amount
You don’t have to pay interest on the incentive amount, but the government calculates the interest equivalent to sharing the upside. This is the case even if there is a modest increase in your home’s value. It will still be quite a bit higher than the rate on your mortgage which means if your home goes up by 20% in a five-year period, the equivalent interest rate would be 3.71%. Take it a notch higher at say 30 percent over two years, the equivalent rate would be 14%.
Qualify for Mortgages Without the Program
Interestingly, the qualification criteria for the FTHBI is really not much different from qualifying for a mortgage without the program. In other words, most homebuyers who qualify for the program would probably qualify for a mortgage without it. So why would someone still apply for the program when you can apply for a mortgage for a home without the limitations of the program’s housing values and still qualify.
According to the government, the program could save buyers up to $286 per month, or annually over $3,430 per year in mortgage payments with the purchase of a $500,000 house. “Owning a house should be a realistic life goal,” Trudeau said in a recent Global News article. “Young people hoping to buy a first home, as their parents did a generation ago, are facing a tough housing market.”
The Global News article also says the Canadian Real Estate Association feels the program offers “tangible support for millennials, new Canadians and other first-time buyers.”
“[It’s] great news that will allow Canadians in Canada’s highest-priced markets take advantage of the program and start building their lives in a home of their own,” CREA president Jason Stephen said in a statement. “We have long pointed out that housing markets vary from region to region and market to market.”
However, David Hulchanski, a professor of housing and community development at the University of Toronto, says when it comes to Canada’s most expensive markets the program won’t be helpful. This means areas like Toronto and Vancouver.
If you are looking to make your first home purchase, it always makes sense to discuss your homeownership goals with a seasoned real estate agent. At OnlyWith.ca we have experience in navigating the challenges of Toronto housing prices. We can assist in your home search and help you find the home of your dreams. Reach out to one of our agents today so we can help you find your home.