The First-Time Home Buyer Incentive will launch on September 2, 2019. Back in March, the new program was announced in the federal budget as a way to help Canadians fulfill homeownership dream. It was introduced to make owning a home more affordable for first-time home buyers, but some of the key details still needed to be clarified.
Today we have a better idea of how the program works. Here’s all you need to know about the the new first-time homebuyers incentive:
- The program is only eligible for first-time homebuyers who have a 5% minimum down payment applying for an insured mortgage through Canada Mortgage and Housing Corporation (CMHC).
- Under the plan, the government would help some first-time buyers by advancing an interest-free loan of up to five per cent of the purchase price of an existing home, and up to 10% of the cost of a new home. (This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.) The interest-free loan would allow homebuyers to take out a smaller mortgage and keep their monthly payments lower.
For example, if you wanted to purchase a home worth $400,000, the 5% minimum required down payment works out to $20,000. With the new incentive, you could receive up to $40,000 through the CMHC. Now, instead of taking out a $380,000 mortgage, you’d need to borrow only $340,000. Say, based on a rate of 3.09%, this would lower your monthly mortgage payment from $1820 to $1,620.
- Buyers must repay the incentive after 25 years or if the property is sold, and they can repay the loan at any time without any penalty.
- If the price of your home increases, the government will get a percentage of the price increase. And if the house price decreases, Ottawa will shoulder a percentage of the loss.
For example, a new house that is purchased for $400,000 could qualify for a 10 per cent interest-free loan worth $40,000. If the home was later sold for $500,000, the home buyer would need to repay $50,000.
There’s more. There are a number of caveats to the program:
- Buyers must have a household income below $120,000 a year. Plus, the amount of the insured mortgage and the CMHC incentive would be capped at four times the homebuyers’ annual incomes, or up to $480,000. That means the most expensive home you can hope to buy under the plan would be worth somewhere between $500,000 and $600,000, depending on the size of your down payment.
For those living in Vancouver and Toronto, where the average home price hovers around $925,000 and $765,000, respectively, this program could seem a little moot. But the federal government is confident it will help homebuyers all across Canada, even in Vancouver and Toronto. Furthermore, having an income limit also means that homebuyers with incomes just under $120,000 would have a significant advantage over those just above the threshold, who would not qualify for this incentive.
- The government has allocated $1.25 billion over three years for the First-Time Home Buyer Incentive. We don’t know what Social Development Minister Jean-Yves Duclos will announce later.
We’ll make sure to update the blog if more information about the program surfaces. Especially after September 2 when the proposed plan will take effect. Stay tuned!