Many of our clients find themselves in a situation where they or someone they know is looking to purchase their first home. It can be difficult to coordinate all factors that go into the purchase of a first home, and in many scenarios, the individuals we speak with are not aware of all resources and programs that are at their disposal. With this in mind, we wanted to address some of the lesser-known options for first-time home buyers. If you, or someone you know is thinking of purchasing their first home, feel free to pass this information on.
What is the CMHC first-time home buyers incentive program?
One of the announcements in the 2019 Federal Budget was the introduction of the First-Time Home Buyer Incentive program. With this program, the federal government, acting through the Canadian Mortgage Housing Corporation (CMHC), assists first time home buyers by contributing up to 10% of the purchase price of a newly constructed home and 5% of a pre-existing home towards the down payment. This essentially means they share in the equity ownership of your home. The aim of this incentive is to reduce homebuyers’ monthly mortgage payments and lower the barrier to enter the housing market.
This program is only available for first time home buyers with a total annual household income below $120,000. It acts as an interest-free loan that is repayable once the primary mortgage is paid off or the home is sold (whichever comes first). The buyer must have a minimum 5% down payment and must apply for an insured mortgage.
As an example, let’s say you’re hoping to buy a resale home for $400,000 with the minimum required 5% down payment ($20,000). With the new incentive, you could receive up to $20,000 through the CMHC resulting in a $40,000 down payment. Now, instead of taking out a $380,000 mortgage, you would only need to borrow $360,000 (not including the mortgage insurance premium). This would lower your monthly mortgage payment from approximately $2,080 to $1,950 assuming a 4% interest rate. Saving you approximately $130/month or $1,560/year. Note that if is it were a newly built home, you could receive $40,000 (10%) through CMHC.
The highest combined mortgage and loan amount available through this program is four times the applicant’s annual household income. This means that the mortgage amount combined with the CMHC loan cannot exceed $480,000. Therefore, the program is available for properties with a maximum purchase price of $565,000.
When the 2019 budget was first released there were questions regarding the repayment of this incentive, however, recent announcements have brought clarity to the repayment. Based on further information received from the Government of Canada, the incentive amount is interest-free, does not require ongoing repayments, and can be repaid at any time in full without a pre-payment penalty. The incentive must be repaid if the property is sold, after 25 years, or completion of the mortgage, whichever comes first.
When repayment is required, how much will be paid to the government? As a shared equity mortgage, the Government of Canada will share in the increase, or decrease in value of the house with the repayment amount based on the property’s fair market value.
For example, let say you received $20,000 from CMHC towards your mortgage based on 5% of a $400,000 purchase price. When it comes time to sell your home, if the value has increased to $500,000, the amount of incentive you must repay is now 5% of the current value, which would be $25,000.
Alternatively, if you received $20,000 from CMHC towards your mortgage based on 5% of a $400,000 purchase price, but at the time of sale, the value of your home has decreased to $300,000,the amount of you would need to pay back is now 5% of the sale price ($15,000).
The program is expected to start accepting applications starting September 2, 2019, and if approved, the purchase must close on or after November 1, 2019.
We recognize that this is not relevant to everyone, but for anyone considering this program, it is important to know how it functions and what your alternatives are when making such an important purchase. Incentives such as this and the Home Buyers Program (HBP) are designed to help people obtain their first home yet are consistently misunderstood or underutilized. If you or someone you know is considering their first home purchase, feel free to contact our office to discuss what is available to you and the advantages/disadvantages of these programs.
Our next newsletter will address the RRSP Homebuyers program and how to take advantage of this program (even if you do not think you can use it).