What is the First-Time Home Buyer Incentive?
From September 2nd 2019 onwards, Canadian first-time home buyers can apply for the First-Time Home Buyer Incentive (FTHBI). For those of you who aren’t familiar with the home buying process, you may want to have a quick glance at our Guide to Buying a Home before going through this article.
For owner-occupied purchases taking place after November 1, 2019 Canadians will have the ability to borrow a portion of their downpayment from the federal government through the FTHBI. A higher down payment helps you lower your mortgage balance, and as a result reduces your cost of borrowing by way of lower mortgage insurance and interest costs. In return for those mortgage savings, the government is then entitled to a portion of your property gains or losses as a part-owner in your home. For example, if you bought a $300,000 home using the 10% FTHBI (which means they gave you $30,000) and sold it 10 years later for:
a. $500,000: You would owe the government $50,000 (10% x $200,000 gain + $30,000).
b. $250,000: You would owe the government $25,000 (10% x -$50,000 loss + $30,000)
The FTHBI amount depends on the property you are purchasing. For newly built homes, you can borrow 5% or 10% of the property value through this program. For all other properties, it’s only 5%.
Am I Eligible for the First-Time Home Buyer Incentive?
You must meet all the following criteria to be able to participate in the FTHBI:
- At least one borrower must meet the government’s definition of a first-time home buyer
- Your qualifying income must be no greater than $120,000
- The property must qualify for mortgage insurance (which means your total down payment, including the FTHBI, must be less than 20% of the purchase price)
- The loan (excluding mortgage insurance but including the FTHBI) must be no greater than 4x your qualifying income
- You must be able to meet the minimum down payment requirement without the FTHBI. The minimum down payment is 5% for properties up to $500,000 in value
- You must be a Canadian citizen, permanent resident or non-permanent resident authorized to work in Canada
New qualification rules in Canada’s high priced markets of Toronto, Vancouver and Victoria:
- Qualifying income has increased to $150,000 from $120,000
- Borrowers can now borrow up to 4.5 (increased from 4) times their household income
While using the FTHBI, it is estimated that the highest possible purchase price anyone could buy is:
- $565,000 in any city except Toronto, Vancouver or Victoria
- $792,000 in Toronto, Vancouver or Victoria
If you are looking to buy above this range, you wouldn’t be able to utilize the FTHBI.
Pros and Cons of the FTHBI
- A lower mortgage balance means that you will save on mortgage interest and insurance costs. With current interest rates being so low, this translates to around 3-8% savings on your mortgage payment (depending on if you use the FTHBI for 5% or 10% on the purchase price).
- You have the ability to repay the FTHBI at any time (within 25 years), so if prices took a bit of a tumble you could choose to pick that period of time to value your home and then repay the loan.
- Your affordability (defined as the maximum purchase price you qualify for) will be roughly 6-15% lower than if you purchased a property without the FTHBI. So you need to be buying well within your affordability range for this incentive to make sense for you.
- If you sell the property, you must repay the FTHBI in full. The worst case scenario is if property prices fell and you were forced to sell, things may be tough financially.
- The FTHBI is registered as a second mortgage on the property, which could impact your ability to seek additional financing with the property as collateral. Additionally, it will be more expensive for you to switch lenders in the future (ex: if you wanted to get better rates) as there are extra legal costs in transferring two mortgage charges.
- If you renovate your home, it’s likely going to increase in value. Since the FTHBI repayment is linked to your property value, that means that you will essentially be paying a portion of your renovation costs back through the program (almost like an added tax on renovations). If you planned on doing renovations, you should consider repaying the FTHBI prior to starting them.
- You can’t port your mortgage without needing to repay the FTHBI.
What is Porting a Mortgage?
When you move your existing mortgage to another property while keeping your same mortgage balance, term and interest rate. Your mortgage must be portable and doing this saves you money by avoiding early prepayment charges since you aren’t technically breaking your mortgage.
Is the First-Time Home Buyer Incentive Worth It?
Assuming you’re okay with the pros and cons listed above that comes with the FTHBI, it essentially comes down to one question: Are the mortgage savings greater than the property gains you would have to pay back? This answer is heavily influenced by two factors: time and location.
Time: Your mortgage savings will be recognized as of the day you start making mortgage payments, while your foregone property gains won’t be realized until you sell the property in the future. Thus, the present value of those gains in today’s dollars gets lower the further out you intend on selling the property.
Location: Since you are repaying the FTHBI on the basis of property price appreciation, residents who live in cities with the highest expected property price growth would benefit less. Mortgage rates will be roughly the same regardless of the city, but the price appreciation can vary wildly. To help illustrate this, we have run the FTHBI Tool across multiple cities using the following assumptions:
Qualifying Income: $80,000
FTHBI Amount: 10% of property value
Time Until Sale: 5 Years
*Note that the chart below is as of September 1st, 2019. Since the outputs are based on fluctuating inputs (ex: mortgage rates may change) your results may differ if you run the tool at a different date.
The above graphic demonstrates the borrower’s net benefit assuming the 10-year average home price appreciation for select major urban cities. We found that the break-even point is around 3.6% annual property gains, meaning that if you expect your property to appreciate by more than 3.6% per year you likely wouldn’t benefit from the FTHBI.
How Do I Apply?
Let’s say you’ve run the numbers and want to proceed. The program will have roughly $400 million of available funding per year and we estimate that if every qualified first-time home buyer applied for this program, there would only be enough funding for 1 in 10 people. If you wish to take advantage of the FTHBI and plan on buying in the near future (you can only apply for the program once your purchase offer on a property is accepted), reach out to your mortgage professional and put together a plan to leverage this new incentive before the funding is depleted.