Taking another look at the First-Time Home Buyer Incentive

What if someone offered you five to 10 per cent toward your down payment on your first home? It might just be enough to make owning property a reality, even if one day you do have to pay back that hand up at market value. Now, what if that someone was the federal government?

The idea of the government having a stake in your home, even if it is as little as five to 10 per cent, might make some squeamish. But Matt Imhoff, a Mortgage Broker with Mortgages.ca, suggests giving some serious thought to what that financial assistance can do for you, especially right now.

What is the First-Time Home Buyer Incentive

Ottawa unveiled the First-Time Home Buyer Incentive about a year ago with the intention of making home ownership more affordable for those just entering the market. It’s a shared-equity mortgage with the Government of Canada offering first-time buyers five to 10 per cent toward the purchase of a newly constructed home; five per cent toward the purchase of a resale or existing home; or five per cent toward the purchase of a new or resale mobile or manufactured home.

The buyer needs at least five per cent of their own money to qualify, but personal and federal contributions can’t add up to a down payment of more than 19.9 per cent. The intention is to help first-time buyers reduce their mortgage payments rather than add to the financial burden that can come with home ownership and, now, the uncertainty of a pandemic.

It’s not a forgivable loan, however. Anyone tapping into the program has to pay back the government based on the property’s fair market value at the time of repayment. That’s either when the homeowner decides to sell or after 25 years — whichever comes first.

Doing the Math on the First-Time Home Buyer Incentive

“For me, the benefits I really see are that it does reduce what your mortgage payment is,” Imhoff says. “So if someone is buying with five per cent down and not using the program and someone is buying with 10 per cent with program, it means a lower payment.”

That’s a particularly helpful scenario for growing families, he notes. Parental leave and the reduced income it brings can be less stressful with lower mortgage payments, for example. The savings on mortgage payments could also be used to pay off other debt or go into a vacation (when things open up), education or retirement account. But the biggest selling point might just be the fact you can pay off your mortgage quicker.

Let’s look at the numbers:

Not using the First-Time Home Buyer Incentive

Purchase price: $500,000 Down payment (5%): $25,000 Mortgage loan insurance premium (4%): $19,000 Total mortgage: $494,000

Payments (five-year fixed at 2.09%): $2,113/month

Balance after five years: $414,608 Payments over five years: $126,802

Using the First-Time Home Buyer Incentive (5%) – Existing Property/Resale Home

Purchase price: $500,000 Down payment (5%): $25,000 First-time Home Buyer Incentive (5%): $25,000 Mortgage loan insurance premium (3.1%): $13,950 Total mortgage: $463,950

Payments (five-year-fixed at 2.09%): $1,985/month

Balance after five years: $389,387 Payments over five years: $119,089

Note: The government shares in five per cent of the value of your property. This is paid either in 25 years, when you sell the property or if you decide to refinance.

Using the First-Time Home Buyer Incentive (10%) – New Construction

Purchase price: $500,000 Down payment (5%): $25,000 First-Time Home Buyer Incentive (10%): $50,000 Mortgage loan Insurance premium (2.8%): $11.900 Total mortgage: $436,900

Payments (five-year fixed at 2.09%): $1,869/month

Balance after five years: $366,685 Payments over five years: $112,145

Note: The government shares in 10 per cent of the value of your property. This is paid either in 25 years, when you sell the property or if you decide to refinance.

In short, paying $128 or $244 less a month on your mortgage, depending on whether you choose the five or 10 per cent incentive, means having $7,700 or $14,600 more in your pocket over the next five years while still coming out ahead on your mortgage balance.

Not convinced yet? Imhoff is happy to go through the pros and cons with clients, and discuss payback scenarios. “If a property goes up in value and the government gets five to 10 per cent of that, you still have 90 to 95 per cent,” he says. “I can look at the numbers to show people. I’m sure anyone who takes advantage of the program isn’t going to be kicking themselves if their property goes up significantly and they have to pay back the government.”

Expanded Program Now Live!

First-time home buyers purchasing a home in the Toronto, Vancouver, or Victoria Census Metropolitan Areas are now eligible for a qualifying annual income of $150,000 versus $120,000 previously, and an increased total borrowing amount of 4.5 times their qualifying income, up from four times previously.

For more information, please visit the following link:

https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive

Written by Matt Imhoff