Canada’s Federal Government has revealed details of a new incentive it says will help make mortgage payments more affordable for first-time homebuyers, but some mortgage industry experts say the caps and restrictions on the program will limit how many buyers will be interested.
The First-Time Home Buyer Incentive will start Sept. 2 and will be run by the Canada Mortgage and Housing Corp. (CMHC). If you qualify for the program, it would provide an interest-free loan that will increase your down payment and reduce your monthly mortgage payments.
The government mentioned the plan as part of the federal budget last March. At the time, details were short on how the program would work, how the loans would be repaid or how a change in the home’s value would affect the repayment.
On June 17, the Government revealed those details, in an announcement by Jean-Yves Duclos, Canada’s Minister of Families, Children and Social Development.
The First-time Homebuyer Incentive will be open to first-time homebuyers who have a household income of not more than $120,000 and who have come up with their minimum 5 per cent down payment.
On top of their own down payment, these buyers would qualify for an additional interest-free payment, worth up to 5 per cent of the price of a resale home and up to 10 per cent of the price of a new construction.
The government’s website gives an example involving the purchase of a $400,000 newly built home.
The buyer starts with the required 5 per cent minimum down payment of $20,000. The buyer could then apply for a 10 per cent loan from the program, or $40,000, reducing the amount needed to borrow for the mortgage. This would lead to mortgage payments that would be $228 a month lower than without the assistance, adding up to savings of $2,736 a year.
But mortgage experts say the restrictions on the program will limit who can apply and how many buyers will be interested.
Under the incentive plan, your total mortgage would be limited to four times your qualifying income. So If your income is $120,000, you could borrow a maximum of $480,000 after making your down payment.
As an article in The Globe and Mail about the program points out, current mortgage rules allow mortgages of up to 4.7 times a buyer’s household income. So participating in the new program would qualify you for a smaller mortgage than if you applied on your own.
Mortgage broker Rob McLister told the newspaper he was struggling to figure out who the program’s target buyer would be, and said he had not been able to come up with a scenario in which a buyer would qualify for a larger mortgage by using the new program.
Although the loan is interest free, experts said another disincentive is that you will have to share any gain in value with the government when you repay the loan.
The amount you repay will be affected by a change in value. If you received a loan of 5 per cent on a $400,000 home ($20,000) and that home increases to $500,000 in value when you sell or repay, you will have to pay 5 per cent of $500,000, or $25,000. If your value declines, you would pay 5 per cent of the lower value.
Another mortgage broker told the Globe that homebuyers who are purchasing below their maximum financial capacity should be able to afford a mortgage without government assistance, and without giving the government a stake in their home’s value.
The Canadian Real Estate association, however, has expressed support for the new program.
Contacted for the newspaper article, Michael Bourque, the organization’s Chief Executive, suggested that those who do participate in the program should consider repaying their loans before making any major investments that would increase their home’s value.
In its March budget, the Liberal Government made another announcement it said could help first-time buyers increase the size of their down payments.
It raised the amount that first-time home buyers can borrow from their Registered Retirement Savings Plans for their down payments. The previous limit of $25,000 has been raised to $35,000. Buyers can withdraw up to that amount, and have to repay the amount over time back into their RRSPs.
If you’re interested in buying or selling property in the Ottawa area, I’d love to chat with you about our city’s market. With more than 30 years of experience in our area, I’ve helped hundreds of clients buy and sell property in neighbourhoods across the city.
You can read about me and my team at www.nancybenson.com. Feel free to give me a call, at 613-747-4747.
If you’d like to read more about the home buyer incentive and how it works, you can visit the federal government’s website, at www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm
To read the June 17 Globe and Mail article about the program, visit https://www.theglobeandmail.com/politics/article-new-incentive-for-first-time-home-buyers-to-launch-sept-2/