First Time Home Buyer Incentive- All You Need To Know

In the current market where house prices are soaring and interest rates are set to test the limits of the sky, the dream of home ownership is getting farther from reality. Especially for first-home buyers who are always on the lookout for help in making their mortgage payments more affordable.

So, when in 2019 the Canadian government announced the first-time home buyers’ incentive (FTHBI) plan in an attempt to help first-time home buyers with their down payments, it definitely looked like a blessing.

Fast forward to 2022 and the First Time Home Buyer Incentive program still has the potential to reduce housing costs; however, borrowers must pay back the loan using a percentage of their home's appreciation.

So before you go texting your realtor asking to window shop new listings here is everything you need to know about First Time Home Buyer Incentive.

How does it work

It allows you to borrow 5 or 10% of the purchase price of your home to put towards a down payment thereby reducing the monthly mortgage payment. In simplest of terms, you co-own the house with the Canadian government.

Let’s assume you have your eyes set on a house worth $300,000 and you have saved up $15,000 as your down payment. The rest $285,000 needs to be borrowed as a mortgage. But if you apply for First Time Home Buyer Incentive, you can get an additional 10% or $30,000 which can be used as a down payment. So, now you can use your savings plus FTHBI money, i.e., $45,000 towards the down payment and you would need to borrow $255,000 instead of the original $285,000

Based on your home of choice the percentage of support provided can range from

• 10% for a brand-new house,or 5% if you already own a home
• 5% down payment on a used house
• 5% for a manufactured or mobile house, either brand new or used

The loan amount itself is based on your property's fair market value and is completely interest-free. It has to be paid back in full in 25 years or when you sell the purchased property.

Am I eligible

As the name suggests, the incentive is only available to Canadian first-time home buyers but you will only be considered a first-time home buyer if

• You’ve never been a homeowner before.
• Homeowners in the event of a divorce or the end of a common-law marriage,
• Those who haven't resided in a home they or their partner owned in the last four years.

This brings us to the eligibility criteria for the program itself

Household income

Your annual income as a family should be less than or equal to $120,000. Unlike traditional measures of income, this one will include passive sources of revenue such as investments, as well as active sources like wages and rent.

Your combined down payment and closing costs can't exceed 20% of the home's buying price. For the first $500,000, the minimum down payment is 5% of the buying price, and in excess of $500,000, it increases the MINIMUM DOWN PAYMENT to 10%. This maximum down payment limit also ensures that the First Time Home Buyer Incentive is only applicable to mortgages that are covered by mortgage default insurance.

Less than your qualifying income

Considering that the maximum income for qualifying is $120,000, the maximum loan amount (to qualify for the incentive) is $480,000. As the average Canadian home cost $711,000 according to research in May 2022, it would be difficult for those with lower incomes to take advantage of the incentive, given that the minimum loan amount is 5% of the applicant's annual income.

If you area a resident of toronto, vancouver, or victoria census metropolitan areas

In three of Canada's most costly housing markets, the federal government and the Canada Mortgage and Housing Corporation (CMHC), which runs the FTHBI program, relaxed the eligibility conditions for first-time homebuyers in May 2021.

If we compare it to the rest of Canada there are 2 major differences. First, the qualifying household income is raised to $150,000.

Secondly, any prospective buyer with an income of up to $150,000 is subject to a maximum loan amount of $675,000. Because of this change, the maximum allowable purchase price in these cities is now $722,000 (up from the previous maximum allowable purchase price of $505,000, which still applies throughout the rest of Canada).

Take the example that you are a Vancouver resident with a $750,000 budget who is interested in purchasing a newly built home. You've got a $150,000 annual income, and you're putting $80,000 down payment. The loan amount you can acquire at 5% with the FTHBI program is $37,750.

This makes your down payment amount to be $117,750. The remaining $632,250 can be raised with the help of a lender which is within the approved First Time Home Buyer Incentive program limits as the maximum loan amount you can acquire is $675,000 due to the program's provisions allowing maximum mortgages for 4 times the annual household income.

What you need to know about the shared equity mortgage clause

The incentive comes in the form of a shared equity mortgage which basically means that the government of Canada will have a share in any profit or loss made in the home’s equity. So although there is no interest that needs to be paid you will have to pay back more if the house increases in value and less if it decreases.

However, on June 2022 the CMHC capped the government’s potential gains and losses to 8% altering the rules of the incentive once again in an attempt to make the plan more approachable to first-time buyers.

In the event of an increase in value, the date of the program's inception will be used as the starting point for the repayment computation (Sept. 2, 2022). Only homebuyers who signed the deal on or after June 1, 2022, will be subject to the new repayment calculation in the event of depreciation.

What's the verdict? should you try the First Time Home Buyer Incentive?

The FTHBI is a great offer if you don't mind the risk of repaying more than you borrow. Nonetheless, there are factors beyond cost, timelines, and monetary considerations that you need to think about before making a final call.

• If you are unable to save a 5% down payment on your own then it might just be a warning sign and maybe you should look into low-income mortgage loan schemes before applying for First Time Home Buyer Incentive.
• There are a lot of potential risks to buying a property, such as increased mortgage rates, upkeep fees, and repair bills. So make sure to check them to make a sound decision.
• There may be additional legal, appraisal, and mortgage refinancing costs associated with the FTHBI's administration, and you should be informed of those as well.
• You might have to avoid renovations until you pay back the loan in full as it would add to the value of the home and thus increase your repayment amount.

If you are still unsure whether or not First Time Home Buyer Incentive is the option for you then may be speaking with an expert with years of experience in the real estate industry would help firm your decision.

The Canadian Home  is a place where millions of real estate experts with real-time property updates are available to answer your call at a moment’s notice.

So, make your life as a first-time home buyer easier today and get The Canadian home app.