What You Need to Know About the Canadian First-Time Home Buyer Incentive
WHAT is the First Time Home Buyer Incentive?
The First Time Home Buyer Incentive (FTHBI) is a new Federal Government program launched September 2nd of 2019 that promises to help first time home buyers with their down payment and mortgage. Over the next three years, this incentive has been earmarked enough money to aid 100,000 individual people and families purchase their first home.
This is done by offering an interest-free loan of 5% (on a resale home and mobile or manufactured home) and up to 10% (on a new build) of the purchase price towards the down payment of your first home. The life of this loan lasts until you sell your first house or 25 years have passed. You can also pay back the loan early without any penalty.
WHO is eligible?
Just because you are a first time home buyer, it does not mean that your automatically qualify for the FTHBI.
In order to qualify you must:
- Have a household combined income of less than $120,000.
- At bare minimum, have the full down payment of the home you are purchasing (a minimum of 5% of the first $500,000 of the purchase price and 10% for any amount over the initial $500,000).
- You are limited to borrowing less than 4X the qualifying income of $120,000. This means that the maximum that a buyer can borrow is $480,000, and lower income households are eligible for even less.
HOW does the FTHBI work?
The FTHBI is run by the Federal Government’s Housing Agency. If you qualify for this program, you can apply for a shared equity mortgage with the Government of Canada. This means that the Canadian Government will share any losses or gains on your home’s equity.
Although this is an interest free loan, the percentage that is paid back to the government is calculated by your home’s fair market value at the time you sell OR after 25 years. This means that you will be paying back more if the value of your home increases, and less if your home’s value decreases over that period of time.
Theoretically, the highest purchase price of a home utilizing this loan is $565,000. It could save homeowners up to $3,430 per year in mortgage payments on a home purchased for $500,000.
WHAT does that mean for you?
The average home price has increased 219% since 1994 (25 years), and, if that trajectory continues, there is quite a good chance that you will be paying the government back more than you borrowed. Your home’s value can rise depending on a multitude of factors including; renovations or major improvements you may have made to your home, increased interest and popularity of the area, development of amenities, scarcity, and much more.
HOW do I decide if the FTHBI is right for me?
This program is a fantastic aid for many first time home buyers. It all depends on whether you are willing to take the risk that you may have to pay back a significant amount more than you borrowed. It is important to keep in mind and weigh all the risks of home ownership including interest rate increases, large maintenance costs, and the possible extra legal and mortgage fees that may accompany paying back this loan in the future.
How long do you plan on living in this home? This becomes a concern depending on when you will sell your home and what your future plans are. If you plan on staying in that first home for 25 years or more, that could be a large chunk out of your retirement plan that you will have to pay back.
It will also depend on where you want to live and the housing market in that area. This incentive will be more realistic for those who do not live in Canada’s most expensive areas, including Toronto and the Greater Vancouver area, as the highest possible price for a home that could qualify for this program is $565,000.
Regardless if you are buying your first, second, or fourth home, I am happy to help out! Give me a call!