On September 2, 2019, the First-Time Home Buyer Incentive (“FTHBI”) program came into effect with the goal of making it easier for young adults to purchase their first home. The program is designed to provide first-time home buyers a shared equity loan with the Government of Canada whereby the Government helps put down an additional 5% towards the down payment of a resale home and 5% or 10% towards the down payment of a newly-built home. As such, by “boosting” the buyer’s total down payment, the FTHBI will end up reducing the amount of the buyer’s overall monthly mortgage payments – thereby providing a form of immediate financial relief for the first-time homebuyer.
Qualifying for the FTHBI program
To qualify for the FTHBI program, you need to satisfy the following criteria:
- At least one person in the household must be a “first-time homebuyer”. That means, the buyer(s) has/have not owned a prior home or dwelled in a home owned by their spouse over the last 4 years. Note, an exception is made for those in a breakdown of marriage or common-law relationship;
- The buyer(s) is/are able to make the minimum 5% down payment in order to qualify for an insured mortgage;
- The buyer(s) combined income cannot exceed $120,000.00. Note, this also includes the income of any guarantors co-signing the mortgage, as well as any rental income generated if part of the home is tenanted out; and
- The total borrowing amount does not excess 4 times the buyer(s) qualifying income.
How the FTHBI program works
Funds provided by the FTHBI program are secured via a second mortgage that is registered on title. These funds do not accrue interest. This loan must be paid back within 25 years or when the home is sold, whichever comes first. However, you are free to prepay the entire loan early without incurring a penalty.
Since the loan is a “shared equity mortgage”, the amount to pay back depends on the fair market value of your home at the time the loan is paid back in full. So, if your home’s value goes up then the loan repayment amount increases but if the value of your home goes down then the loan repayment value decreases. Here’s two examples to better illustrate this point:
Scenario 1: Marshall wants to buy a new home for $400,000.00 and has saved $20,000.00 to make the necessary 5% down. Under the FTHBI program, Marshall can apply to receive a $40,000.00 shared-equity mortgage from the Government of Canada – as the FTHBI program can cover up to 10% of the cost of the new home as an additional down payment. With the increased down payment, Marshall’s monthly mortgage payments get reduced. Few years later, Marshall sells the home for $430,000.00, which is the fair market value of the home. The FTHBI program will result in Marshall paying a percentage of the equity (in this case, 10%) back to the Government to discharge the second mortgage off of title. This amount would equal $43,000.00. The Government has made a profit.
Scenario 2: Marshall wants to buy a new home for $400,000.00 and has saved $20,000.00 to make the necessary 5% down. Under the FTHBI program, Marshall can apply to receive a $40,000.00 shared-equity mortgage from the Government of Canada – as the FTHBI program can cover up to 10% of the cost of the new home as an additional down payment. With the increased down payment, Marshall’s monthly mortgage payments get reduced. Few years later, Marshall sells the home for $380,000.00, which is the fair market value of the home. The FTHBI program will result in Marshall paying a percentage of the equity (in this case, 10%) back to the Government to discharge the second mortgage off of title. This amount would equal $38,000.00. The Government has incurred a loss.
Disadvantages to the FTHBI program
While the benefits of the FTHBI program are self-evident, the program also has a few disadvantages. For instance:
- First-time home buyers can expect to get charged higher legal fees since lawyers have to now close 2 mortgages;
- To determine the fair market value of the home, at the time the incentive is paid off, home owners will need to get the property appraised;
- The program results in first-time home buyers to be on the hook for a potentially much higher loan repayment amount if their property is located in a hot market where real estate prices are increasing; and
- The prerequisite criteria of the FTHBI limits first-time home buyers to purchase a home that has a purchase price of 4 times their qualifying income amount when, in reality, the buyer could qualify for a higher mortgage amount if they seek out a traditional loan and purchase a home they truly want.
Conclusion
If you have any questions regarding today’s Tidbit, please do not hesitate to contact Khemka Law or counsel of your choosing. We are always here to assist you. If want us to talk about a particular topic in our Thursday Tidbit program, please get in touch with us! Thank you for your time and consideration.
Sincerely,
Pranav Khemka
Pranav Khemka, Barrister & Solicitor
T: (403) 457-9577 | F: (403) 457-9578
E: pkhemka@khemkalaw.com
LEGAL: This Thursday Tidbit provides general information only and does not constitute legal advice. Circumstances may vary and no lawyer-client relationship is established from the use or reliance of this information. You are strongly advised to seek any legal advice by directly contacting Khemka Law or counsel of your choosing. Khemka Law does not warrant or guarantee the quality, accuracy or completeness of any information found within this Thursday Tidbit.