First Time Home Buyer Incentive
As you have probably heard time and time again, things are expensive. One group that is especially vulnerable to the rise in prices are young adults who are just starting to get a career going and now must decide between high rent prices or saving a lot of money for a downpayment with high interest rates.
In a recent survey, young Canadians showed increasing pessimism about the current economy. The survey, which was conducted between September 27th and October 11th, found that 74% of Generation Z and millennial Canadians do not believe the country’s economic situation will improve in the following year (compared to 66% last year). That is a frighteningly high number and is one of the reasons why 23% of participants disagreed with feeling generally happy, and 26% said they have experienced significant depression.
All signs point to a tough time for the younger population, and adult who are just starting to move out not only have rent, car, food and other normal costs, but they are also trying to pay off student debts.
For this reason, it makes more and more sense why we are seeing young adults feel like they could miss out on their life goal to own a home, at least for the foreseeable future.
Not all is lost, there is some relief in a strata building amendment coming next year which we have talked about in a recent blog, but there is also one incentive that we have not discussed yet that is relatively unknown to many first time home buyers; the First-Time Home Buyer Incentive.
First Time Home Buyer Incentive
The First Time Home Buyer Incentive was proposed to help qualified home buyers ease the load of their monthly mortgage payments. It is a shared-equity mortgage loan with the Government of Canada. Yes, you co-own the home with the government.
The percentage of support changes depending on the type of home you are buying:
- 5% or 10% for a newly constructed home
- 5% for a resale home
- 5% for a new or resale mobile or manufactured home
The incentive is a loan based on the property’s fair market value. The loan is interest-free, and there is not a set way in which you must pay it back without incurring penalties (monthly, yearly, etc.), but there is a few conditions that you will want to be aware of:
- The loan, in its entirety, must be repaid within 25 years of the date borrowed or when you sell the home, whichever comes first.
- While the loan is interest-free, it is a “shared equity mortgage,” which means the government shares in any gains or losses on the property value up to a maximum profit or loss per year of 8% (not compounded)
Example
To help you better understand how this incentive works, we have included an example:
Let’s say that you qualified for a mortgage of $400,000 on a resale home and already have $20,000 saved. Since it is a resale property, The Government of Canada will pay 5% of the cost of the property, at $20,000, making your total down payment $40,000, which equals a 10% down payment.
To add on to this example, let’s say you are able to pay $60,000 of the down payment on a $400,000 resale house, and the Government of Canada pays 5% at $20,000. This would make your total down payment $80,000, which is a 20% downpayment, meaning that you may qualify to not have to pay mortgage insurance on your home.
Who qualifies for the First Time Home Buyer Incentive
There are some obligations to who can qualify:
- Must be a first-time home buyer
- Must have a household income of $120,000 or LESS
- The mortgage is capped at 4.0 times the maximum household income of $120,000 ($480,0000), which means the average price of a home would be $500,000 to $600,000, depending on the down payment.
- You must be a Canadian citizen, permanent resident, or non-permanent resident authorized to work in Canada.
- You also must meet the minimum down payment requirements with traditional funds (which include savings, RRSP withdrawals) or a non-repayable financial gift from a relative or immediate family member.
*It is important to note that the Government of Canada has recently modified the eligible criteria for homebuyers in Toronto, Vancouver, and Victoria. In these areas, home buyers are now eligible for an increased Qualifying Annual Income of $150,000 instead of $120,000, and an increased total borrowing amount of 4.5 instead of 4.0 times their qualifying income. This change would increase their buying power to roughly $722,000, up from $505,000.
What makes this First Time Home Buyer Incentive so valuable?
The First Time Home Buyer Incentive is so valuable because it is already so tough to get a downpayment for their future homes. Additionally, with interest rates currently at high levels, you can have a greater downpayment so that you are not paying as much interest over time and lowering your monthly costs. Since the incentive is interest free, you can have a worry free mind knowing that you only must pay back the amount borrowed instead of even more additional costs (as long as you follow the conditions).
Conclusion
We think that this incentive is an amazing addition for First Time Home Buyers, as it will make buying a home easier. We understand it is not perfect, and many homes still may be priced out of the range the government allows, but this should help a large number of First-Time Home Buyers be able to at least consider buying.
To some this may be a surprise that this incentive exists as it is not the most widely known incentive. This would explain why the number of people who have used the incentive is under 20,000, even though in 2019 the Liberal Government hoped at least 100,000 Canadians would take advantage.
We also want to point out that this is a Liberal Government incentive, meaning that it could go away at anypoint if there was to be an election and the Liberal Government did not win.
If you have any questions about how this incentive can help you, please give us a call or email.
