For those of you looking for a bit of a break getting into the housing market, you may be in luck! The new federal governments First-Time Home Buyer Incentive FTHBI is designed to alleviate mortgage costs for first-time home buyers and as of September 2nd will officially be open for business.
So, how does it work?
The government will provide shared equity loans of 5% toward the down payment of a resale home, and 5% or 10% for newly-built homes. The intention behind the incentive is by increasing the buyers downpayment, monthly mortgage costs will decrease, in turn providing some relief to the costs of home ownership. For example, a buyer receiving the maximum 10% loan on a newly-built home could save as much as $286 per month, resulting in $3,430 in savings per year, according to the CMHC. The funds provided are registered as a second mortgage, and don’t incur interest. This second mortgage must be paid back in full when the first insured mortgage matures at 25 years or when the home is sold, whichever comes first, though homeowners may pay it back as a lump sum early without penalty.
Because it is a shared equity mortgage rather than a traditional cash-value loan, the amount to be paid back will fluctuate along with the value of the home over time: if the home’s assessed value rises, the loan repayment will increase by the same per cent. However, the same will occur if the home has lost value by the time it is sold or the mortgage matures.
For example, let’s say the CMHC provides a 5% loan of $25,000 for a home purchase of
$500,000. The homeowner sells the home several years later, and its value has increased to $550,000. The homeowner would then need to pay the CMHC back $27,500 to reflect 5% of the increased value of the home. However, if the home loses value over that time period, only the original amount of $25,000 would be due to the CMHC upon its sale.
Who qualifies?
- At least one person in the household must be a first-time home buyer, meaning they have not owned a home, or dwelled in a home owned by their spouse, over the last four years. (An exception is made for buyers who’ve had a breakdown of marriage or common-law relationship.)
- Buyers must have a minimum 5% down payment saved in order to qualify for an insured mortgage.
- Buyers’ combined household income cannot exceed $120,000. This includes the income of any guarantors co-signing on the mortgage, as well as any rental income generated if part of the home is tenanted out.
- The buyers’ Mortgage-to-Income Ratio (MTI) cannot exceed four times their income, including the portion that’s provided by the FTHBI. This means the maximum down payment for a resale home cannot exceed 14.99%, and 9.99% for a new build.
Who Will Benefit from the FTHBI?
Some mortgage experts point out that borrowers taking out a traditional mortgage would
actually qualify for a larger loan based on more generous MTI criteria, while others argue that home buyers could be on the hook for a much larger loan repayment if they live in a particularly hot market where real estate prices are rising.
There are concerns the criteria of the FTHBI are too restrictive to really help the average first time buyer. For example, a household earning the maximum income of $120,000 and making a 5% down payment would be limited to a resale home purchase price of $505,000 – an amount too low to have much traction in larger markets.
For example, buyers are hard pressed to find a resale home within the eligible price range in the City of Toronto, where the average home price came to a whopping $937,804 in May. In fact, there are only 13 out of the city’s 35 MLS district neighbourhoods where such homes are available – and options are limited to condos located away from the city core, including North York condos and Etobicoke condos.
Have more questions about the FTHBI or want to see if its a good choice for you, give me a call at 416-809-4544 and we can discuss the options available to you!
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