I, in no way, qualify for First Time Home buyer status.  So why would this topic be a post?  Now that I am a Real Estate agent, I have an even greater need/interest in government programs regarding the buying and selling of Real Estate. I need to know this for the benefit of my clients.  45 years ago when I actually bought my first house, there was a new home buyers program that I took advantage of.  It was like the TFSA.  You could put money in, and allow it to grow, then take take it out tax free, if you used it to buy your first house.  That was a good deal.  You can still do that today, using the TFSA account.  Something I strongly recommend. They just don’t advertise the TFSA that way.  You have to realize that the government doesn’t like loosing money.  Even if it is for the benefit of the people.  That is why the current government doesn’t like raising the limit on the TFSA account.  Because for every dollar you put in, they loose tax revenue.  And we all know that nobody spends money as efficiently as the government.  (big sarcasm here!!)

Sorry. I got carried away.  There is a new program out there by the government called the “FIRST-TIME HOME BUYERS INCENTIVE.  It is not similar to the old one. But at first look, this seems like a great program.  But lets look at the real story.  Why is the government doing this?HELPING MAKE HOME OWNERSHIP MORE AFFORDABLE.  The First-Time Home Buyer Incentive helps qualified first-time home buyers reduce their monthly mortgage carrying costs without adding to their financial burdens.”**  Isn’t that nice of the government.  They really care. They forget a word at the very end there. TODAY.

Who is qualified for the program?  These are a few criteria to determine your eligibility for the First-Time Home Buyer Incentive:

  • you have your minimum down payment (5% or 10%)
  • 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 home buyer
  • you are a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada**

How much do they contribute?  A 5% or 10% shared equity mortgage.  The Incentive would allow eligible first-time home buyers, who have the minimum down payment for an insured mortgage, to apply to finance a portion of their home purchase through a form of shared equity mortgage with the Government of Canada. For the purchase of an existing home, an Incentive amount of 5 percent is available. For the purchase of a newly constructed home, an Incentive amount of 5 percent or 10 percent is available to qualified buyers. The larger Incentive amount is intended to help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.**  WOW.  the government will contribute between 5% for resale, and up to 10% of the down payment for new construction. Sounds great.  If you have more than 20% down payment you don’t qualify.

What is the benefit to the Buyer?  Reduce Monthly Mortgage Payments. The Incentive enables first-time home buyers to reduce their monthly mortgage payment, without increasing the amount that they must save for a down payment. No on-going repayments are required, the Incentive is not interest bearing, and the homeowner can repay the Incentive at any time without a pre-payment penalty. The shared equity mortgage means that the government shares in the upside and DOWN SIDE of the property value.**  So if the value goes up, what I pay back goes up, but there is no interest. But if the price goes down I should have to pay back less.  That is true sharing.  Don’t get too excited just yet.  If the price goes down so will the payment.  If you are paying off before a sale, the price has to be supported by an appraisal.  That will run you about $400 – $600.00.  Also the repayment MUST be a lump sum.  You can not do this in installments.

HERE’S AN EXAMPLE FROM THE GOVERNMENT WEBSITE. Anita wants to buy a home for $400,000. Through the Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program, on top of the minimum required down payment of $20,000 (5% of the purchase price) from savings. This lowers Anita’s mortgage amount and reduces the monthly expenses. As a result, Anita’s mortgage is $228 less a month or $2,736 a year. What if Anita has an annual qualifying income of $83,125? To be eligible for the First-Time Home Buyer Incentive, Anita will have to purchase a home that is no more than $350,000 ($83,125 X 4 = $332,500 plus down payment). Anita still has the required minimum down payment of 5% of the purchase price ($17,500) from savings, and can apply to receive $35,000 in a shared equity mortgage (10% of the cost of a newly constructed home). This would reduce Anita’s mortgage payments by $200 less a month or $2,401 per year. What if Anita sells the home for $420,000? At this time, the Incentive will need to be repaid. Anita will repay the Incentive as a percentage of the home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling the house.  Just a question?  In what major Canadian city can you buy a new home for those amounts??  And this means that when Anita sells the house, $42,000.00 of the selling price goes back to the government who only lent her $35,000 in the first place.  That means if she sold the house in 2 years, the government would have made a 10% a year return.  Yeah that is why there is no interest charged!  Who would borrow at 10% at this time??  And you thought real Estate commissions were high?  At least we do something (or should) for the money.

How long do I have to pay it back?  The home buyer must repay the Incentive after 25 years, or when the property is sold, whichever comes first. The home buyer can also repay the Incentive in full any time before, without a pre-payment penalty.  There is a slight catch: The home buyer will have to repay the Incentive based on the property’s fair market value at the time of repayment. If a home buyer received a 5% Incentive, they would repay 5% of the home’s value at repayment. If a home buyer received a 10% Incentive, they would repay 10% of the home’s value at repayment.**  If the value of the house were to go UP, then so would the amount that you have to repay.  If the value goes up 10% so does the repayment, based on the new value of the house.  There might not be any interest, but there is a financial benefit for the government.  If Real Estate follows history, (goes up), they will likely get more back than they gave you.  They feel you will be OK with this, because this will only happen in either 25 years or when you sell.  If your house went up in value, they feel you will not object to paying back more money than you were lent in the first place. If the price went up it comes out of your profit. (You really OK with that??)

Let us look at another example of this;  You bought your house in 1996 in Toronto.  (Average cost $166,400.00**)  You held on to it.  Your 25 years for this program are over.  You now have to repay the 5% the government gave (lent) you. ($8,320.00  back in 1996) But that 5% repayment is based on TODAY’S value. How much would that 5% be at today’s house prices?  Today’s average house price in Toronto is about $815,800.***  You would owe 5% of $815,800.00 or $40,709.00.  That means the government got the equivalent of 6.5% interest compounded each year.  Not a bad investment for them.  Would you have $40,709.00 just sitting around that you could give them??  Remember this has to be a Lump Sum payment!!

OK, so what if the value of the house goes down?.  As long as you can support the price decrease via an appraisal (which you have to pay for), or the actual sale cost of the house, then the repayment will go down the same amount. Example:  You bought the house for $400,000.00, you got a 5% incentive from the government ($20.000.00).  You sell the house for $380,000.00, you still have to pay back 5% of the value.  ($19,000.00)**

Can I pay it back monthly over 10 years? Simple answer. NO!** 

You can use the incentive for a rental property, up to 4 units, and can include the actual rental income from the property, in addition to your actual earned income, for calculating the qualifying income amount.**

My personal take on this incentive program??  This is really good if you can find a house under $400,000.00 max. (subject to income qualification) If you can pay off the incentive in under a year, so that the value of the property hasn’t gone up too much.  And that this was an election “goody” to buy votes.  It would have been more beneficial to increase the TFSA limit to $10,000.00 a year.  That would have helped every Canadian.

My suggestion? Take your monthly house Down Payment savings money, put it into a TFSA, and invest that in a mutual fund that pays at least 6%, and you will do much better.  Your mortgage payment might be higher every month, but any equity you make in the home will be yours in the end.  If we use the government example.  Anita buys the $350,000.00 house, and gets the 10% incentive. The money the government lent her is $35,000.00. Her mortgage savings is $2,400.00 a year. She lives in the house for 10 years, then sells it. The house has increased in value by 2% a year for 10 years.  She sells the house for $427,000.00.  She has to repay the incentive, $42,700.00 (427,000 x 10%).  If Anita had invested the full amount of mortgage savings for the last 10 years ($2,400 x 10 years), and gotten 6% compounded interest she would have $37,800.00 in the investment account.  She would still be short $4,900.00 to repay the incentive.

It looks nice that your mortgage payment would be $200.00 a month less.  But there is little chance that the Anita in the example (or most people) would put ALL of that savings into an investment. So she would be even more money short, when it came time to pay back the incentive.

If your only concern at this moment in time is reducing your monthly mortgage payment, this incentive will do that.  Just remember, this is an expense that never goes away, has little chance of going down, and MUST Be repaid.  You have ZERO control of how much you will have to repay. There are alternatives available. Ask your Mortgage broker about them.  As a Real Estate agent who just cares about selling the house, this is great.  As a Real Estate agent who cares about their clients, we would need to go over the math to see if this is good for you.

The color matches where the info came from.  **Government of Canada National Housing Strategy website **Internet search Average house price in Toronto 1996.  *** Internet search Average house price in Toronto 2019. **Direct conversation with CMHC rep.