The First-Time Home Buyer’s Incentive – the federal government’s much-debated mortgage equity sharing program – went into effect Sept. 2. It’s designed to reduce monthly mortgage costs by boosting qualified buyers’ down payments with an interest-free cash infusion from Canada Mortgage and Housing Corp. (CMHC) (five per cent for resale homes and five per cent or 10 per cent for new builds).
Critics of the incentive say its criteria is too restrictive to have much of an impact on affordability, especially in Canada’s most expensive housing markets.
The biggest points of contention have been focused on the FTHBI’s income and mortgage-to-income (MTI) restrictions. To qualify, first-time home buyers (meaning they have not owned a home or lived in one owned by their spouse, in the last four years) and cannot have a combined household income that exceeds $120,000. Their MTI cannot exceed four times that amount. This income cap also applies to any guarantors co-signing the mortgage, as well as any forecasted rental income, should the home have a secondary suite.
The way the math shakes out is, assuming a buyer has the maximum income and is making a five-per-cent down payment on a resale home, the maximum home purchase they could make using the FTHBI is $505,000.
Not surprisingly, new data finds that this makes usage of the FTHBI less feasible in the nation’s urban centres. A study from Zoocasa of 25 major markets finds that, based on average home price, properties in six cities would not qualify:
- Greater Vancouver (Average home price: $967,314)
- Greater Toronto (Average home price: $806,755)
- Fraser Valley (Average home price: $717,301)
- Victoria (Average home price: $652,655)
- Hamilton-Burlington (Average home price: $600,577)
- Kitchener-Waterloo (Average home price: $520,750)
For those looking to utilize the FTHBI in smaller or secondary markets, however, there is some good news – the study found 19 of the assessed markets had average prices that fall within the qualifying threshold.
It’s important to note that this is a look at average home prices; in each market, there may be housing stock priced low enough to qualify, though agents will be harder pressed to find such options in the Vancouver and Toronto markets.
Should your client use the FTHBI?
Tapping into government funds to ease entry into the housing market may seem like an appealing approach – but it’s not a fit for everyone.
First, to qualify, your client must still have a minimum down payment (between five and 7.5 per cent) saved of their own funds to put towards the home purchase, and they must also satisfy the requirements for an insured mortgage, which assumes their credit score and debt obligation ratios are healthy.
It’s also imperative that clients understand how the equity sharing portion of these loans work. Essentially, the amount provided via the FTHBI is added onto the home as a second mortgage. Your client won’t pay any interest on the loan, and they won’t have to make any payments until the home is sold, or the mortgage matures after its 25-year amortization. However, as the CMHC retains five per cent of the home’s equity, the amount they pay back will reflect how the property has appreciated or depreciated over that time frame.
For example, let’s say they receive a five-per-cent loan of $25,000 through the FTHBI for a home purchase of $500,000. The homeowner sells the home several years later, and its value has increased to $550,000. The homeowner would then need to pay CMHC $27,500 to reflect five per cent of the increased value of the home. However, if the home loses value over that time period, only the original amount of $25,000 would be due to CMHC upon its sale.
It is especially important for home buyers to be aware of this in hot markets where prices are steadily increasing, as their loan payment amount could be significantly larger than what they initially received.
Is your market a good fit?
The bottom line is, if your client is curious about utilizing this new program, be sure to explain whether it’s a good idea based on their home expectations, and what’s available in their local market. It’s also a great idea to steer them to a mortgage professional who can assess whether their borrower profile would make a good fit, or whether they’d be better off taking out a traditional mortgage.