Announced earlier this year by the Canadian government as a bid to address the problem of housing affordability, the First-Time Home Buyer Incentive (FTHBI) program now has a start date in place. According to Canada.com, the program will officially launch on Sept. 2, with the first closing date set to Nov. 1, 2019.
How It Works
The program offers eligible first-time home buyers the opportunity to split owning costs with the Government of Canada through a form of shared equity mortgage. By applying for this type of financing, homebuyers can take out a smaller mortgage. This, in turn, would result in lower monthly payments.
The government is looking to encourage housing supply by offering a loan of up to 10% of the purchase price for new homes. The incentive for existing homes is 5%. This measure is meant to encourage builders to add new stock by giving potential home buyers more purchasing power.
Applying for the Incentive
To qualify for the program, first-time home buyers must have an annual income that doesn’t exceed $120,000. Also, the insured mortgage plus the incentive amount cannot be more than four times the household income.
For a household with an income of $120,000, the mortgage amount plus the incentive is capped at $480,000. The program is only available to buyers who have the minimum down payment for an insured mortgage.
The incentive must be repaid after 25 years or if the property is sold, whichever is earliest. However, it can be repaid at any time without incurring pre-payment penalty.
Crunching the Numbers
James Laird, co-founder of Ratehub Inc. and president of CanWise Financial, presented an example for Canada.com:
A household with $100,000 income, putting a minimum down payment of five percent, can currently qualify for a home valued at $479,888 with a $2,265.75 monthly mortgage payment […] The maximum purchase price for the same household, if they participate in the First-Time Home Buyer Incentive program, drops to $404,858.29 with a five percent minimum down payment. The total mortgage amount would then be $400,000 or four times their household income.
Due to the cap on annual income, the most expensive home that buyers can hope to purchase with this program would be worth between $500,000 and $600,000, depending on the size of the down payment.
Given these price caps, critics believe that first-time buyers looking for housing in Toronto or Vancouver will not be able to take advantage of the program, since the average home prices in May 2019, according to CREA statistics, were $794,800 and $1,006,400 respectively.
Potential Risks and Impact
By undertaking a shared equity mortgage, the CMHC (Canada Mortgage and Housing Corporation) participates in the appreciation or depreciation of the property value. The buyer repays the loan based on the current value of the property.
As the CMHC explain on their website:
You receive a 5% incentive of the home’s purchase price of $200,000, or $10,000. If your home value increases to $300,000 your payback would be 5% of the current value or $15,000.
Similarly, the government will share in any downside of property value and shoulder a percentage of the loss:
You receive a 10% incentive of the home’s purchase price of $200,000, or $20,000 and your home value decreases to $150,000, your repayment value will be 10% of the current value or $15,000.
The CMHC also announced that the total amount of funding will be $1.25 billion over three years. While this amount certainly has the potential to incentivize people into becoming home buyers, only time will tell if it will also lead to a boost in housing supply, or if it will lead to an increase in prices for lower-priced homes.