Earlier in the year (2019) there was quite a bit of whispering going on around what the federal government would do to assist hopeful first time buyers step onto the property ladder in today's market here in Canada. The idea is a tough one to tackle, particularly on a nation-wide front because while house prices are constantly inflating in areas like Toronto and Vancouver, elsewhere in the country there are recessions with falling property values.
During the spring budget announcement, brokers like myself were waiting with baited breath to see what they might announce to make it easier for our clients to get into a home. The highly controversial FTHBI was announced to much confusion, speculation and no shortage of criticism.
We had to wait all summer however, for the rules and guidelines to be sorted out for exactly how this program would work. September 2 was launch day so after a little digesting of information I am ready to pass along the details.
Let's unpack this shall we?
What exactly IS it?
The biggest misconception surrounding the program is that it will help buyers meet the minimum down payment to purchase. This is not the case. What this program will do, is 'top up' your down payment to bring your borrowed amount down (in return, dropping your monthly costs) in exchange for an equity stake in your home. You still need to come up with the minimum 5% down payment (or more depending on the property) and you still need to be able to qualify for the purchase under the regular stress test rules. Under the FTHBI the government will match your 5% down on pre-owned homes for a total down payment of 10%, or they will top up 10% on new build purchases to a total of 15% down payment.
When does it start? The program was rolled out September 2 and is now available for applications, however, the funding date of the mortgage must be after November 1st. It is important to note that there is a cap on this program, the government has committed 1.25 billion dollars over the next 3 years. Once this money is used the program may no longer be available unless future governments choose to contribute more funding and carry on the program. How do we qualify?
The program does have some limitations which will affect eligibility and rule out a substantial portion of the population. - income cap is set at $120k/year for the total income being used on the file. This means, if you and your partner are buying a property together your total combined income must be less than $120k. It also means that if someone is co-signing for you we must take their income into consideration as well. Also, this includes ALL qualifying income, so if you are looking at properties with a basement suite that you are going to rent out and need to use that rental income to qualify for the purchase it will be included in your income on the file. Also, they are going to be very strict about purchases where one spouse buys without the other on the file as they want to ensure you are not intentionally trying to get around the rules by leaving a spouse off the purchase to keep your income under the threshold. - your total borrowed amount is capped at 4 times the total income on the file plus the incentive they are adding in. It should be noted that for many clients the maximum purchase price they would be approved for under this program is actually less than if they did not go through the program at all.
- credit scores must be suitable for an insured purchase (bare minimum score of 600, but over 650 are more likely to be approved). All regular insurer guidelines apply for stress test and debt ratios. - at least one of the purchasers in the transaction must be a first time home buyer. This is defined as someone who has not in the previous 4 years occupied a home that they or their spouse/common law partner has owned (unless you have gone through a breakdown of marriage/relationship). - your 5% down payment must come from personal savings/RRSP or can be gifted to you from an immediate family member. You can not combine this program with a borrowed down payment 'flex down' program. - it must be an owner occupied home - not a rental property.
How does it work?
The government is offering the 'top up' of down payment in exchange for an equity stake in your home. The incentive will be registered as a second mortgage on your property and must be paid out if you sell the property or after 25 years. The equity stake they will hold is either 5% or 10% depending on how much they put into the down payment and you will be required to pay this back at the value of the property at the time of repayment. So if your house appreciates in value when you sell, you will be paying back the 5 or 10% of the sale price - not the original incentive amount. If the house depreciates in value and you take a loss - you will be paying back the 5 or 10% of the sale price in that case as well. If you have stayed in the home, you will be paying back the 5 or 10% after 25 years at the appraised value of the home at that time, regardless of whether you have fully paid off your home or not at that point. You can choose to pay this incentive off at any point during the time you own the home, the amount to pay off would be calculated at the appraised value of the home at that time. So if property values dropped for instance and you wanted to take advantage of a lower property value you could take advantage of that to repay a lower amount than originally invested. Is it worth it?
I have been running calculations all week and reading up on examples and my honest personal thoughts are, No. But of course, this is a decision that is highly dependent on your personal views. - I don't like the idea of the government owning a stake in your home. And initially, when you factor in the CMHC insurance fees as well, they will own more of your home than you do on day 1. In fact, on day 1, when you go into a purchase with 5% down, after you factor in the CMHC insurer fees of 4% - you will own 1% of the equity in your home and the government would own either 5 or 10%. - The monthly savings do not seem to be worthwhile to me. If you are purchasing a pre-owned home and the government adds in a 5% incentive, the most you can save per month (based on 5% down and a max income of 120k/year at the max purchase price) is $96. If you choose the new home incentive and the government adds in 10%, the max monthly savings (based on the same criteria) is around $208. This amount fluctuates depending on the current interest rate. That might actually seem like a lot of money - but I want to break that down a bit. In the example where you save $208/month, the government has added in $50,000 as 10% down on a 500k purchase. If you took that $208/month and put it into a savings account in order to save for the re-payment of the incentive amount - it would take you 20 years to save up the $50,000. Of course, if the house has appreciated in value over those 20 years as well it would take even longer because you would be repaying more than the 50k. And let's be honest, if you think the $208/month is a deal maker/breaker - you probably shouldn't be buying a $500,000 house. In comparison, dropping your purchase price by roughly $40,000 will also save you over $200/month, require less down payment, and cost less in CMHC insurer premiums and if monthly affordability is your biggest concern, then I don't think you will argue that there is a massive difference between a $460k house and a $500k house. My criticisms aside, there are some areas where I think this program may actually really work for someone and everyone's file is very different depending on their personal situations, so if you are curious how it would look for yourself, let's talk!
As always, feel free to reach out to me anytime to discuss your mortgage options, 780-720-4034.