Opening the Door to Homeownership With Government Programs for First-Time Buyers

Did you know that over the past 20 years, property prices have increased at double the rate of income growth? This means that Canada as a whole is right in the middle of a housing affordability crisis. This crisis is partially fueled by dramatic interest rate hikes by the Bank of Canada in their battle against inflation and rental prices that are projected to reach heights as tall as the Empire State Building. Needless to say, if you are an aspiring first-time home buyer in the current times, buying a home at an affordable price might just prove to be a challenge, especially if you are a young adult. According to a recent study, 20% of young adults live in unaffordable housing, spending over 30% of their pre-tax income on housing costs.

That is the reason why the government of Canada has been hard at work introducing program after program to safeguard the Canadian first home buyer from the rising affordability crisis. From using your RRSP towards purchasing a property to outright co-owning the house with the government, there are many options to make buying your first home a little easier. Today we will tell you about 4 must-know programs that can help you buy your dream home but first.

Who Is a First-Time Home Buyer as per the Government?

Generally speaking, a first-time home buyer is anyone buying a property for the first time, but when the government is involved, things tend to get a more formal and clear definition, and such is also the case with first home buyers. That is why before you start applying for the listed programs in this blog, it is important for you to know if, in the eyes of the government, you are a first-time home buyer or not.

To be considered a first-time home buyer, you must meet the following criteria:

• You must be a Canadian citizen or permanent resident.
• 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.
• You must not have received a home as a gift or inheritance in the past four years.

Please note that from here on the term first time home buyer will be referring to those who meet the above mentioned criteria.

1First Time Home Buyer Incentive Program (FTHBI)

In this program, first-time home buyers can borrow 5 to 10% of the home's purchase price for the down payment, reducing their monthly mortgage payment through a joint equity mortgage. In simplest of terms, you co-own the house with the Canadian government.

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.

2Home Buyers Plan (HBP)

Introduced in February of 1922, the home buyers plan (HBP) is a simple program that allows first-time home buyers to withdraw up to $35,000 from their RRSP short for Registered Retirement Savings Plans. You can then use this amount towards the purchase or building of a home. Here's the best part you get 15 years to pay it all back which starts from the second year of withdrawal and the amount is absolutely tax-free for that entire duration. This means that through RRSP you can save for that down payment from the moment you get a job as long as it is not a locked-in or a group RRSP.

3First Home Savings Account (FHSA)

First introduced in the 2022 budget with the sole purpose of countering housing affordability and helping millions of first-time home buyers over 5 years, FHSA is essentially a tax-free savings account. You can open this account through any of the qualifying issuers such as a bank, credit union or trust/insurance company. You can also have multiple FHSA accounts through multiple issuers but it cannot exceed the participation limit for that year.

For example: if the annual contribution limit for an FHSA is $8,000 and an individual has already contributed $2,000 to their FHSA in a given year, then their participation limit would be $6,000. This means that they could contribute up to $6,000 more to their FHSA in that year without exceeding the annual contribution limit.

FHSA holders will also be able to roll over their unused contribution limits from year to year. For example, if your 2023 contribution limit was $8,000 but you only gave $4,000, your 2024 limit would be $12,000.

4The Home Buyers Tax Credit

About an average of 250,000 Canadians apply for home buyer’s tax credit each year and for good reason. It is one of the easiest first home buyer’s incentives to apply for and can be split between your spouse or common-law partner as long as it does not exceed the $10,000 limit. All you have to do is during tax season; simply enter the Home Buyer's Amount of $10,000 on Line 31270 of your tax return. This credit results in a $1,500 rebate on your taxes, calculated at the 15% personal tax rate. If you owe less than $1,500, your taxes will be reduced to zero without an additional refund, as it's a non-refundable credit.

However, it's important to note that if you don't owe income tax in the year you purchase the home, there is no benefit to claiming the HBTC. We also advice to keep your home buying documents handy in case the CRA needs proof of eligibility.

The Bottom Line

As a first-time home buyer what you must keep in mind is the fact that these government programs are not a game changer by any means. They do provide some much needed relief from the affordability crisis but you must be prepared from your end as well. These programs only work when you have maintained a good credit score, have saved up enough for the down payment and have done your due-diligence when it comes to how much you can afford. Only then will you be able to maximize the benefits of these programs and increase your chances of successfully navigating the home buying process.

The Canadian home has a detailed blog on all of the programs mentioned in today’s list. We recommend checking them out if you need more information on eligibility and how to apply.