First Time Home Buyers Incentive

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Getting into your first home is difficult these days, because homes are incredibly expensive, especially in the major markets across the country.

For that reason, the government has rolled out a new program to try and help new buyers: The First Time Home Buyers Incentive. It is so new that I don’t really have an opinion about it, but I will lay it out for you. Keep in mind, this is different than the First Time Home Buyers Plan in which you can access funds out of your RRSP to help fund the purchase of your first home.

First off, not all first-time buyers can qualify for this program. Outlined below are the specific criteria that must be met:

  • Must be a first time buyer OR have not lived in a home you owned or co-owned for the previous 4 years.

  • Household income must be below $120,000 from all sources of income.

  • There is a minimum down payment requirement of 5% on the first $500,000 and 10% on anything above that.

  • You may only borrow up to 4 times the amount of your qualifying income.
    Example: Someone with an annual salary of $100,000, the maximum amount their mortgage can be is $400,000.

If all of the respective criteria are met, the government will loan you money to decrease your mortgage payments. However, it is important to note, the government will then share in the equity in your home.

How Much Will They Loan Me?

If you are buying a resale home, they will lend up to 5%.
If you are buying a new build, they will lend up to 10%.

Now, this all sounds great, but there is a catch… eventually, you have to pay them back and not necessarily the amount of the original loan. You have to pay them back the value of their share when you sell the home, or after 25 years, whichever comes first.

Let’s Break It Down

Imagine…

Household Combined Income: $100,000
Maximum Mortgage: $400,000
Government Loan: 10% (New Build)
Mortgage Length: 25 years
Interest Rate: 3%
Purchased Home Price: $400,000

Side Note: My guess is that I can basically guarantee people will use this program to buy a bigger, better house. The program would allow them to buy a place for about $450,000 and have a similar monthly payment to buying the $400,000 house. But for simplicity sake, let’s pretend people aren’t bad with their money.

First, here is a comparison of mortgage payments with and without the First Time Home Buyers Incentive:

Scenario A: Without First Time Home Buyers Incentive
Purchase Price: $400,000
Down Payment: $20,000
Mortgage Payment: $1,868/month

Scenario B: With First Time Home Buyers Incentive
Purchase Price: $400,000
Down Payment: $20,000
Government Loan: $40,000
Mortgage Payment: $1,653/month
Savings: $215/month

Example #1: You Live In The House For 25 Years

So, you do this, likely forget about it and live in the house for 25 years. 25 wonderful years go by you are all pumped up because you think you are mortgage free! But then the government reminds you that you owe them still for the loan. And remember, you don’t owe them the $40,000 they lent you, you owe them 10% of the value of your home.

25 Years Later

Real Estate Values: Increase @ 3%/year
Original Home Value: $400,000
New Home Value: $837,500
Government Loan at 10% of the Home Value: $83,750

And guess what? You owe them the $83,750 in one shot. This could end up being a serious kick in the junk for a lot of people.

Example #2: You Live In The Home For 7 Years & Then Sell

Now let’s look at example 2, where people decide to live in their home for 7 years.

Unfortunately for some of us, this won’t look like this at all if your home has barely gained any value, but I’ll use the same 3% growth rate and keep it simple.

7 Years Later & Selling Your Home

Real Estate Values: Increase @ 3%/year
Original Home Value: $400,000
New Home Value: $491,000
Remaining Mortgage Balance: $277,000
Sold Price: $491,000
Selling Costs: $25,000
Government Loan at 10% of the Home Value: $49,000
Remaining: $140,000

This is a pretty good case scenario. Even if your house didn’t gain in value, it’s actually not too bad of a deal. You’d still be left with about $60,000 in equity to put into your next home.

Final Thoughts

Upon this review, I’d think this is a decent plan for first time home buyers who plan to move at some point, but not as good of a deal for people who plan to live in their first house forever.

Hope you learned something and happy house hunting. Feel free to subscribe at any time.