Posted on
January 16, 2020
by
Heather Cleveland
CLICK HERE to view the HIGH-QUALITY version of this article.
FTHBI
There seems to be more criticizing than applause, so let's discuss some of the pros and cons so you can decide for yourself if the program is right for you.
WHY?
The Liberal government introduced the FTHBI program in September 2019' intending to make it easier for first-time homeowners to purchase a property and lower the monthly payments through a shared equity mortgage.
THE BASIC 411
- Canada Mortgage and Housing Corp (CMHC) administers the program that offers qualified first-time home buyers a 10 % shared equity mortgage for a newly constructed home, 5 % existing homes home in exchange for an equity stake. Consider the Incentive as a second mortgage.
- The Incentive must be paid in full when the property is sold, after 25-years, if you are buying out the co-borrower, porting your mortgage, or there is a change in use.
- A qualified buyer can withdraw funds from an RRSP to purchase or build a home without having to immediately pay tax on the withdrawal.
- The property must suitable for full-time and year-round occupancy, and not a revenue property.
- Additional fees will be insured upon closing because your lawyer will need to process two mortgages. And, you may also incur additional appraisal charges.
CMHC'S EXAMPLE
Anita wants to buy a new home for $400,000.
Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) from the Government of Canada.
The Incentive lowers the amount she needs to borrow and reduces her monthly expenses.
As a result, Anita’s mortgage is $228 less a month or $2,736 a year.
SOME CONSIDERATIONS
- When the home is sold, the government takes back the same percentage amount on the new value. So if your home sells for a higher price, they get more than they initially invested while you paid for all the related costs, mortgage insurance fees, renovations, and upgrades costs, plus you did all the maintenance.
- On the Incentive program, if your property value increases, then you're forgoing a portion of the tax-free benefits on the appreciation value.
- If the value of your property goes down, you still owe the government the same percentage amount on the new value, and their money comes out first, which will affect how much you walk away with.
- It could take much longer to be approved for this program than for a normal mortgage loan, and sellers may not be willing to wait.
- At this time, it's not clear if the government will allow refinancing on the first mortgage and postpone their security on the new financing, which could create more risk and complications for the lender on the first mortgage.
WHAT WOULD I DO
It seems like the new program could help some first-time buyers focusing on lower price point properties get into the market because it can lower monthly payments. However, the opportunity does not come without costly strings attached and unknowns that I am not comfortable with.
For me, the potential risks are higher than the possible gains.
The Incentive does not help buyers save for, contribute to the down payment or lower the bar to make it more feasible. And it also doesn’t help buyers in Canada’s most expensive cities like Toronto, Vancouver, etc either because property value far exceeds the limit. It's also interesting that they share the gains on resale when the homeowner invests all the time, money and effort. Yet, they don't take less if the property loses value on resale. Interesting...
WHAT TO DO NEXT
Do your research and educate yourself on all the details of the program then speak to different industry professionals for their feedback and insight on various aspects of the program.
- Contact your mortgage broker and bank for all your options.
- Reach out to your real estate lawyer and get their insight.
- Plan out the potential best and worst-case scenarios.
Once you've gathered all the information, you can decide if the First-Time Home Buyer Incentive Program is right for you.
Get in touch with me if you have any questions.
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