First-Time Home Buyer Incentive? Read the Fine Print Before You Sign

General Melanie Ward 7 Oct

The First-Time Home Buyer Incentive (FTHBI) just rolled out on Sept 2 2019, and already Trudeau is promising to expand it if he gets re-elected. But while the FTHBI is promising to make home buying more affordable for young – or first time home owner – Canadians, just what is it exactly?

What is the First Time Home Buyer Incentive?

It’s a Canada Mortgage Housing Corp. (CMHC) -financed, shared-equity mortgage program. This means that, while you don’t have to pay a monthly amount on the loan, the government will share in the gains and losses of your home’s value as it fluctuates over time. The incentive offers 10% toward the down payment for a new home, and 5% for resale homes, interest-free.

Who qualifies for the FTHBI?

  • You have to be a first time home buyer
  • Your household income must be less than $120,000: including investments and rental income.
  • You have at least the minimum down payment, which is 5% of the first $500,000 of the home’s purchase price, and 10% for any amount above that. 
  • The total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price (this insures that all these loans are CMHC insured)
  • Your total mortgage must be less than 4x  your qualifying income. Since the maximum qualifying income is $120,000, that means the largest amount any qualifier can  borrow is $480,000 — including the mortgage, mortgage insurance and the FTHBI amount. Considering the median range for houses in Canada recently topped 480,000 that keeps most houses still out of reach for first time buyers.

Is it really interest free?

Well, technically yes. It’s designed to “help first-time homebuyers without adding to their financial burdens”.You won’t pay any interest for the duration of the loan, and could potentially save $1-300 per month on mortgage payments on new and resale houses in the  $500,000 range, or about $25,000 or $50,000 respectively. However, there is a catch. When you sell the home, or after 25 years, you will be expected to pay back the loan….but…and here’s where things get complicated…not the dollar amount. 

What will I be expected to pay back?

Instead of paying back the dollar amount on the loan, the CMHC wants a profit share on the percentage that they loaned you for the house – either 5% or 10% depending on what they loaned you. That profit share will be based on the “fair market value” of your home at the time that you sell.

What does this mean? 

Well, if you own your house for 25 years, and real estate continues to climb the same way it has been, your 450,000 home could easily balloon to over a million dollars. If you make any renovations that improved your investment, then that could add to the cost. That initial loan of $25,000-$50,000 could suddenly be over $100,000. That might be ok if you’ve prepared for that, but what if you are entering retirement? 

Even if you sell before then, and your property has gone up, you might be in for some shock after your legal fees, closing fees etc…by the time you’ve closed your deal. 

So is it a bad deal?

Incentives are never a bad deal, but it’s important to go into this one with your eyes open, and be prepared with the number the government is going to take at whatever point you sell your home. If you are keeping your home, definitely include putting aside this money in your financial planning so it’s not a shock later on. 

My advice to buyers is to look at ALL the factors involved. If I was the government, I would have to say, what’s in it for me?  If we are going to lend out money, how can it benefit and serve both parties? Well, I guess this was their answer. 

I personally would not want to have to pay the government any more than they already take, but if I needed to take this route, because it was my only way to get the funds together to get into the market, then I would go for it. I think it is much better option than not getting in to the ever-growing real-estate market.   

 I would rather pay back a higher interest loan and own my property outright.  I’d probably pay less in the long run on a higher interest rate than lawyer fees, not to mention 5-10% of the sale proceeds.  

I think it’s always worth finding the exact rates and terms, and crunch real numbers. Mortgage professionals like myself ask all the questions to ensure you are educated and aware of your options. The FTHB may be for you, or there may be better options.