UPDATE: June 18, 2019
Some more information was just released from the government about the new First Time Homebuyer Incentive run through CMHC, so it’s about time we went back and updated our old post to give clarity. The original post will remain underneath, unedited, but the information above the line is the current correct information.
Originally announced in the 2019 federal budget, the new First Time Homebuyers Incentive (FTHI) is scheduled to come out on September 2, 2019, and was aimed at helping younger families finally break into the housing market. While detached homes have fallen in value from their 2016 highs, they’re still unaffordable for many, causing the price of condos to go up at the same time.
When it was announced, it grabbed a lot of attention – but not for good reasons. Industry experts largely agreed that this new plan wouldn’t do much for most homebuyers because of its strict criteria, and didn’t actually address the root problem: high housing prices.
Critics of the plan suggest that this might even increase housing prices as people are able to get and extra $25,000 - $50,000 to put towards a down payment. Let’s take a look at exactly what the FTHI is, how it works, and what it means for the average Canadian.
The program is being run through the Canada Mortgage and Housing Corporation (CMHC), a crown corporation.
The CMHC will give up to 10% of the purchase price of the home as a loan to a first time homebuyer in exchange for a portion of the house equal to the amount of aid received. So if you get 10% of the purchase price loaned to you, the CMHC will own 10% of your house going forward.
Yes, that means that the CMHC will get to take part in your equity appreciation. If home values go up, the dollar amount you owe CMHC also increases.
The loan is due when you sell the home, or after 25 years if you never sell. If the house has gone down in value, CMHC says that it will simply take the loss, rather than have you repay the full amount of the original loan. So if they give you $30,000 on a $300,000 home (10%) but the home value decreases to $280,000 when you sell, you would only owe CMHC $28,000.
Obviously, the First Time Homebuyers Incentive is only available for first time homebuyers, but there are also more criteria you have to meet.
To be eligible, you must:
· Have a household income under $120,000
· Purchase a home with a mortgage amount (plus incentive) no greater than 4 times your annual income
· Have a down payment of between 5% - 20%
· Pass the mortgage stress test
What’s interesting about those first 2 points is that it effectively caps the program to homes under about $505,000 (with 19.99% down), but more realistically, to properties around $490,000 (with 5% down). And you can only get that much if you make exactly $120,000. If we take into consideration the median household income in Canada, which is $74,287, then the program will only let you buy a home up to roughly $300,000.
A quick look on realtor.ca shows that there are only 9 current listings for properties under $300,000 in Toronto, and only 7 under $300,000 in Vancouver. So this will do effectively nothing to help homebuyers in two of the hardest real estate markets in the world to get into.
Something else to note is that you still have to pass the stress test, which reduces affordability by around 20% on average. And people that makes $120,000 with good credit could likely be approved for much more than the maximum amount that this program offers.
The biggest problem is the loan amount. The 10% figure only applies to new houses, not ones already built. If you want to buy an existing home, that figure is cut in half: just 5%.
The program also has earmarked $1.25 billion to help “100,000 Canadian families.” That sounds like a lot of money, but it works out to just $12,500 per household. If they really plan on helping 100,000 families, and they can give a maximum of 10% as a loan, that means that average mortgage amount would be just $125,000. So either they’re vastly underestimating the value of homes in Canada, or overestimating the number of people they can help.
Unfortunately, it doesn’t actually seem like the FTHI is seriously going to help many people, at least in hot real estate markets.
People with good income and credit can qualify for a mortgage amount that’s more than the allowable mortgage amount under this program, meaning that they’d have to buy a home that’s worth less than what they could get.
People with low income can only receive up to a certain amount of assistance because the program is capped to 4x their income. If the household only makes $60,000, they can only get a mortgage up to $240,000. With current housing prices, they would have to live in Alberta, Saskatchewan, Manitoba, northern Ontario/Quebec, or the Maritimes to find a property priced that low.
The federal budget for 2019 was just released, with some interesting ideas for prospective homebuyers. The Liberal government is introducing a new CMHC program and enhancing the Home Buyers’ Plan to try and help Canadians buy homes. But will these new programs actually help Canadians? Let’s take a look.
New First Time Home Buyer Incentive
Adding to the list of Canadian first time home buyer programs is the First Time Home Buyer Incentive.
The Canadian Mortgage and Housing Corporation (CMHC) will earmark $1.25 billion over the next 3 years to hand out as loans to new homebuyers if they meet certain qualifying criteria. The CMHC is a crown corporation, meaning it is owned by the government: giving the CMHC the money is just how the government will distribute the funds.
The qualification criteria are:
1. Household income must be less than $120,000 per year
2. Must have at least 5% down payment (the minimum down payment in Canada for all properties)
3. Home value cannot exceed four times the applicant’s income
a. As the maximum income is $120,000, this effectively puts the cap on the mortgage value at $480,000
4. The mortgage must also be insured by CMHC
a. This means your down payment is capped at 20% of the purchase price. Purchase with 20% down or above are uninsured
For many real estate markets, this program won’t be very effective. The average detached home price in Toronto, for example, is still over $1 million. Even the average condo price in Toronto is $529,900, well above the maximum threshold.
There is no word yet on how this loan would be repaid, but it’s likely to be paid out when you sell the home. There’s also no word on the interest rate, but it does say there will be no monthly payments, so it won’t affect your cash flow.
Something important to note is the amount of money you get is determined by whether the home is new or existing. Existing home purchases are only eligible to receive 5% of the purchase price, while new builds can get 10%. This comes at the same time as new housing starts are expected to decreaseover the next 2 years, making many people ineligible to receive the full 10%.
With housing starts on the decline, there’s going to be more pressure on existing homes. But since existing homes only qualify for half as much aid, it’s going to be hard for first time buyers to break into the market.
Improved Home Buyers’ Plan
The second part of the budget aimed at helping first time home buyers is the enhancement of the Home Buyers’ Plan. The HBP allows you to take up to $25,000 from your RRSP ($50,000 in total for a couple) to put towards a down payment on a house. You then have to repay the amount taken out over 15 years. As a side note, you don’t have to put the money back into the same RRSP account, just any RRSP account. If you don’t, 1/15th of the borrowed amount gets added to your taxes.
The improvement allows individuals to withdraw up to $35,000 from the RRSP ($70,000 for couples). The repayment period is the same, which boosts the maximum repayment from $1,666 per year to $2,333 per year, assuming you withdraw the full amount for an individual.
Problems With The Budget
Many real estate and mortgage experts have weighed in on the changes, expressing dissatisfaction. Some of the issues they have are with the HBP as a way to help homebuyers and the cost of the CMHC loan.
The increased HBP amount only helps if the homebuyers already have more than $25,000 in the RRSP. As living costs increase while wages are relatively stagnant, there’s little room for many to put away thousands of dollars – let alone $35,000 into an account that can’t be touched until retirement or a home purchase.
The repayment terms for the CMHC loan are unclear, but there are few good scenarios. Either CMHC takes a fixed stake in the property value (10% for example) which they then recoup at the sale, or they charge a flat interest rate, or they charge no interest and simply require principal repayment.
Let’s say you buy a $500,000 property and it appreciates to $550,000 in three years when you decide to sell. You’d have to pay CMHC back $55,000, $5,000 more than you got. That’s the equivalent of paying an interest rate of 6.3% on a $50,000 loan, nearly double the best 5-year fixed mortgage rate.
It’s also unclear if you will be able to use that portion of ownership as equity when applying for a refinance or home equity loan. If it reduces your equity by 10% no matter your home value, you’ll have to build up much more equity before you’re able to take anything out, as you need to have at least 20% equity for a normal refinance. Losing 10% of your equity could mean you need 30% equity before you’re able to use it!
Flat Interest Rate
Since this loan isn’t repaid until the house is sold, a flat interest rate isn’t the best solution. A reverse mortgage is similar, in that you get a lump sum at the beginning of the term and only repay it when the home is sold. Also like a reverse mortgage, there aren’t any monthly payments.
This sounds good at first, but when you get charged interest on a balance that never gets paid down, interest accelerates. It only takes around a decade for a loan to double in value if there are no payments, so the longer you stay in that first house the more it would cost you. I doubt this will be the route they choose.
This is best for the home buyer but worst for the Canadian taxpayer and CMHC. If there’s never any interest charged, inflation eats away at the value of money. If it takes 10 years for the loan to be repaid, then that 10% they put in may be worth 16% less. If it takes 20 years, it could be worth 31% less!
In this case, the Canadian taxpayer would be subsidizing the purchase of any first time homebuyer that took part in this program, as the money recouped would never cover the cost of lending it out. I also suspect this wouldn’t be the route they choose for repayment.
All-in-all, these new measures are unlikely to help most first time homebuyers, and may even result in a small increase in housing prices as those that do qualify suddenly have 5 – 10% more money to bid with. Time will tell if homes will become more affordable.
If you want to see what you can afford right now, check out our affordability calculator.