The Canadian has offered a new incentive to first time home buyers. The incentive seems great, does it make sense for you?
Being a first time home buyer can be an overwhelming experience. One major stress comes from the cost of the home and covering major costs like the down payment.
The Canadian government has introduced a First Time Home Buyer Incentive that helps people across Canada purchase their first home.
Here are the details of the program:
The program is a shared equity mortgage which means they share in the upside and downside of the property value. It allows you to borrow 5 or 10% of the purchase price of the home.
You pay back the same percentage of the value of your home when you sell or within a 25-year window
You have never purchased a home before
You did not occupy a home that you or your current spouse or common-law partner owned in the last 4 years (the 4-year period begins on January 1 of the fourth year before the Incentive is funded and ends 31 days before the date the Incentive is funded)
You have recently experienced the breakdown of a marriage or common-law partnership (even if you don’t meet the other first-time home buyer requirements)
You have your minimum down payment (5% of purchase price)
Your total annual qualifying income doesn’t exceed $120,000
Your total borrowing is no more than 4 times your qualifying income
You or your partner are a first-time homebuyer
You are a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
If you meet this criteria, you can apply for the incentive once you have been pre-approved for a mortgage, and found the home you’re looking for.
There are advantages, no doubt
The advantages of the program are that you can put down a large down payment which will help reduce your monthly mortgage payments. If you manage to put down 20% total (yours + incentive) you won’t need to pay CMHC fees (which is mortgage insurance fees), which will reduce the amount of interest you pay overall. This pdf shows multiple examples of how much can be saved by using the program.
But there can be downsides...
As much as there are upsides with the program, there can be a downside. You just need decide if it’s worth it to you.
When it comes to paying back the loan, you have to pay it when you sell, or after 25 years. It has to be paid in full, and no partial payments are allowed.
Home is purchased for $310,000. Incentive provides you with 5% of the purchase price, $15,500. You sell the home 25 years later, and the house price has gone up to $400,000. You have to pay 5% of the home’s selling price, which is $20,000. The loan has cost you $4,500 over the 25 years. The potential payment reductions with the incentive are $12,503. This means the loan has saved you over $8000.
This is an incredible savings, but there is a point when the loan ends up costing more than it is worth. If the price of the home goes up too much, you’ll end up paying more in interest, than you have gained by having the lower payments and no CMHC fees.
If the house price goes up to $600,000 in 25 years, the total amount you will have to pay back is $30,000, meaning the loan has cost you $14,500. In this case, the incentive has cost you more than it saved you.
For this reason, you’ll want to monitor the housing prices in your area. If the prices are increasing quickly and will have your home value higher than the loan is worth than you may want to pay the loan back early.
My own experience
In 2012, my husband and I were looking at purchasing our first home. At the time, the City of Hamilton was offering up an incentive to first time home buyers. There were certain criteria you had to pass in order to be eligible, but if you were they would provide you 10% of purchase price of the house.
We purchased our house for $222,000. We put down 10%, $22,200 and the City of Hamilton provided the other $22,200, allowing us to provide a 20% down payment and avoiding CMHC fees. If you stayed in the house 25 years or more, the loan would be forgiven, but if you sold before then, you had to pay back the original loan plus 10% of the capital gain you made on the house (capital gain = sold price – purchase price). When we purchased the house the Hamilton market wasn’t what it is now, and we decided that if we were going to stay in the house 5-7 years, and the price went up to $275,000-$300,000 max, the loan would make sense.
By 2016, we noticed that the Hamilton market had really picked up and that the price of our house if we were to sell would be more than our “make sense point”. It was at this time, we decided to go to the bank, and talk about taking out a line of credit to pay back the loan early. We were able to get our house assessed at $275,000 (which was definitely lower than the average market) and had to pay the city back $27,500 ($22,200 of the original loan + $5,300 (10% of the capital gains). The CMHC fees would have cost us about $6200 over the term of our mortgage, so at this point in the game, the loan worked to our advantage. The downfall was that we had to take out a line of credit to cover the cost of the repayment, but with how little the interest rate was, it was worth covering the cost of the line of credit until we sold our house in 2018. In 2018, we sold our house for $513,900. If we had to pay back the loan when we sold our house, it would have cost us $22,200 (the original loan) plus $29,190 (10% of the capital gains - $513,900 - $222,000). This meant it was a good thing we paid back the loan early.
If the government incentive had been available at the time, and let’s say they gave us 10% for math sake (we’d only receive 5% now, because our house was resale). We would have had to pay back $29,100 total when we sold our house in 2018, instead of the $51,390 we would have had to pay back to the City of Hamilton. It still would have been costly, but much better than the City’s incentive.
My overall thought
Based on our experience, these loans can definitely be helpful, but have a breakeven point where it no longer makes sense. I would say it’s helpful in the beginning when you don’t have the money to increase your down payment, but if you were going to go forward with this incentive, you want to determine at what point the incentive no longer makes sense and keep an eye on things.
For more details about this incentive, check out the Government of Canada website.
Learn more about the process of becoming a first time home buyer here.