The Federal government last week announced details of its planned First-Time Home Buyer Incentive, which is aimed at helping first-time buyers get a foot on the housing ladder. We took a close look at the details and consulted financing experts to see what this announcement could mean for home buyers in the Greater Toronto Area.
Proposed and passed in the 2019 budget, the First-Time Home Buyer Incentive will come into effect on September 2, 2019 and will assist qualifying first-time buyers by reducing the size of the mortgage they will need to take out, thus reducing monthly payments.
In simple terms, the incentive is a shared equity program, with the Government of Canada offering up to 5% of the purchase price for resale homes and up to 10% of the purchase price for new homes. As you might expect, there are certain criteria and terms that must be met in order to qualify. The incentive is only available for first-time buyers with a household income of up to $120,000. Buyers must also be able to pay a minimum down payment of 5% of the purchase value on their own.
In addition, the buyer’s mortgage and incentive amount combined must not be greater than four times the household income. It starts to get a little complicated with that final criteria but an example will make it clear. If buyers have the maximum allowed household income of $120,000 for example, the maximum total of the incentive plus the mortgage amount is $480,000 (4 x $120,000). That would mean a maximum purchase price of just over $505,000 if the buyer has the minimum 5% down payment.
Of course, the money offered by the government won’t be free, but the terms seem quite generous. No interest will be accrued on the money loaned and the government will share the risk. In practice, this means the amount you need to pay back will go up or down with the value of your home. The incentive will need to be repaid after 25 years, or when the property is sold if that happens sooner. At the time of sale, you will pay the government a percentage of the sale price equal to that given to you (up to 5% for resale and 10% for new homes). If you don’t sell your home, you will pay the percentage based on the “fair market value” of the property after 25 years.
Perhaps the most interesting feature is that the definition of a First-Time Home Buyer is broader than you might expect. According to details released by the Government of Canada, you qualify as a first-time buyer if you meet one of the following conditions:
- You have never purchased a home before
- Your marriage or common-law partnership has broken down
- You did not occupy a home you own in the last four years (the four-year period runs from January 1 in the fourth year before your property purchase to one month before your property purchase)
The Government of Canada has set aside $1.25 billion over three years from September 2, 2019 for this incentive and say that it will be awarded on a first come, first served basis. That means that, while it is intended to run for three years, it could end sooner if there is a high demand for the incentive.
The stated aim of the First-Time Home Buyer Incentive is to help to make homes more affordable for middle-class Canadians. Will it achieve those goals? We spoke to Shubha Dasgupta, President and CEO of Capital Lending Centre, and he felt that the incentive won’t have much of an effect in the GTA: “The impact felt in the GTA directly caused by The First Time Homebuyers Inventive will be very minimal. The program itself does not appear to apply in one of Canada’s largest real estate markets. Under current mortgage qualifying rules, an insured home buyer can borrow approximately 4.5 times their income when buying a home. The new incentive restricts this amount to 4 times their income. Overall, they are unable to borrow as much which is a real issue in the GTA where home values are higher than other regions.”
That does not mean that the incentive has no benefits and Mr. Dasgupta was quick to point out that it could be beneficial to Canadians purchasing in less expensive real estate markets, stating that “the effect on affordability would be felt in smaller markets across Canada rather than the two largest: the GTA and GVA. In smaller, regional markets we could see this being a benefit and helping some Canadians access homeownership. I feel this is a very regional product.”
Mr. Dasgupta went on to explain that one of the main benefits of this new incentive is the fact that it reverses a decade-long trend of restrictive regulations by governments: “Since 2008 there has been over 30 government imposed regulatory changes introduced. All were aimed at tightening the mortgage landscape making it more difficult to borrow. This is the first time in over a decade that we have seen easing to the rules. Importantly, this indicates a shift in perspective from a government level which hopefully begins a new era where we can expect further easing over the coming years.”
While the First-Time Home Buyer Incentive took the majority of the headlines, there was another, no less significant announcement by the Federal Government as plans for a Shared Equity Mortgage Provider Fund (SEMP) were also revealed. Working alongside the buyer incentive, the SEMP takes an alternative approach at improving affordability by assisting shared equity mortgage providers.
These providers offer similar options to the First-Time Home Buyer Incentive, with the provider offering a percentage of the property purchase price and terms agreed for how much will be repaid and when. With a $100 million fund, the Federal Government hopes to attract and encourage new shared equity mortgage providers by loaning money to non-profit, governmental, indigenous or private organizations. These organizations will then use the money to offer shared equity loans to individual buyers.
This has the potential to have a big impact on the way properties are purchased in Canada. Having seen the early details of the SEMP fund, Shubha Dasgupta felt that there were some notable potential upsides both for the government and the mortgage market: “CMHC and the Government will receive a great benefit from the increase in house prices over the course of the next 25 years through the fund. I also feel that this opens up the door to more innovative loan products to launch over the coming years which may change the lending landscape for the better. We’ve already begun seeing companies begin raising capital for shared equity loans which could spur options in the mortgage market.”