The Incentive

Posted by Tim Lintick on Friday, July 19th, 2019 at 1:41pm.


In the wake of ever increasing challenges for first-time home buyers to get into the real estate market, the feds have come up with a plan that they are hoping will help first-time buyers get their feet wet. The mortgage stress test introduced last year is making it harder for all buyers across the board who must avail themselves of federally regulated banks to help with the financing of their purchase. (Private lenders and credit unions however are exempt from the stress test, and so no doubt have seen an increase in their mortgage business, although buyers may be subject to higher interest rates). Here's How It Works: Eligible buyers are able to apply to finance a portion of their home through a form of Shared Equity Mortgage with the Government of Canada. Yes, this means the federal government will own a piece of your home, and will likely be registered on it along with any other financial institution that is supplying the rest of the mortgage money. But perhaps that's a price that's okay to pay, as they are willing to lend the money when perhaps no one else will. They are also willing to take the fall, if property values decline, but they will also share in the gains, if property values increase. However, buyers don't have to make any payments to the government until they sell the home, or after 25 years, whichever comes first. So they receive the benefit of the money, but don't have to repay it until the house sells. At any rate, here is a synopsis of what the new First Time Home Buyer Incentive (the Incentive) is all about, and what it can mean for first time home buyers. 1. The Incentive is actually an interest free Shared Equity Mortgage, where the government shares in the increase or decrease of the property value in exchange for lending the money for the purchase. 2. It is available to first time buyers whose maximum, qualified annual household income is no more than $120,000. 3. Buyers still need to have the minimum downpayment of 5% to be eligible, and the mortgage must be insured with CMHC, Genworth or Canada Guaranty. (Home purchases with the minimum downpayment are considered high risk and must be insured, which adds an extra cost to the monthly mortgage payment). 4. For a resale home, buyers are eligible for an Incentive of 5% of the home's purchase price: for example, if a house costs $200,000, the Incentive will provide $10,000. 5. If that home's value increases to $300,000 when it is sold, the payback would be 5% of that current fair market value, or $15,000. So, the government made $5,000, in exchange for lending $10,000 interest free at the time of purchase. 6. For a newly constructed home, buyers are eligible for an Incentive of 10% of the home's purchase price: for example, if a new house cost $200,000, the Incentive will provide $20,000. 7. If that home's value decreases to $150,000 when it is sold, the payback would be 10% of the current fair market value, or $15,000. So, the government actually lost $5,000. 8. While the government may take a hit, you are still responsible for repaying the shared equity mortgage based on the current home value at time of repayment. 9. No on-going repayments are required, and the Incentive is not interest bearing. 10. The Incentive will thereby reduce monthly mortgage payments, by lowering the amount a buyer needs to borrow from a financial institution. 11. The Incentive can be repaid at anytime without a pre-payment penalty. The payback is based on the property's fair market value at the time of the payback. (Not sure how it will work if a buyer wants to repay before the house is sold. A means of determining the fair and current market value would have to be arranged, such as an appraisal perhaps). 12. As an example, a buyer purchasing a $500,000 new home would still need the 5% downpayment of $25,000, plus the 10% Incentive of $50,000, the insured mortgage would be $425,000, plus the Insurance Premium of added onto the mortgage would be $11,900 for a total mortgage of $436,900, with a possible monthly mortgage payment (depending on interest rate, amortization and terms) of $2,187. That could mean a savings of $3,430 each year. 13. The Incentive starts on September 2, 2019. The first closing date will be November 1, 2019. So, in a nutshell, it is an interest free loan from the government that does not need to be repaid until the property is sold. A pretty sweet deal that will no doubt be seen as manna from heaven for first-time buyers anxious to have a home to call their own. It is unfortunate that this Incentive is only available to first-time buyers, as I am sure that many up-sizers and down-sizers and others needing to move for work or family would like to take advantage of this offer also. The program is also geared to help fuel the new housing market, as first time buyers of newly constructed homes are eligible for a larger Incentive than with resale homes. The feds have already loosened the rules for first time home buyers about borrowing from RRSP's for downpayments. They have increased the withdrawal limit amount to $35,000 from $25,000. (Buyers still have to repay the amounts to their RRSP within 15 years, however). So something to look forward to as we head into the fall market! Sellers will have more buyers out there for their properties, as first-time buyers allow mover-uppers to gain a foothold on their next dream home. Let's hope the market stays balanced and remains a win-win for both buyers and sellers.

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