It might be a little easier for you to buy a home with the new First-Time Home Buyer Incentive. As the name suggests, the incentive lends a helping hand to first-time home buyers.
On the surface the incentive sounds great. High home prices coupled with the mortgage stress test have made it tougher to afford homes in pricey real estate markets like Toronto and Vancouver in Canada. But does the incentive actually help address that? Let’s take a closer look at the incentive and how much it will actually help first-time home buyers.
The First-Time Home Buyer Incentive at its heart is a shared-equity mortgage. Shared-equity mortgage may not be a term you’re very familiar with and who can blame you. Shared-equity mortgages aren’t that common or popular in Canada, but the government is looking to change that.
A shared-equity mortgage is, as the name suggests, a mortgage where the lender (or in the case of the Incentive, the government), contributes towards your down payment. But instead of loaning you the money, the lender/government takes an equity stake in your property.
The good news is that this helps makes the monthly carrying costs of homeownership more affordable since you’ll have lower mortgage payments. The bad news is that the lender/government has an equity stake in your property. Although you won’t have to repay any amount while you’re living in the property, once you go to sell it, you’ll have to pay back the lender/government – and not just the original amount you borrowed, you’ll also need to pay back a portion of the amount your property has gone up in value.
The incentive started accepting applications September 2nd. Under the Incentive, first-time homebuyers who earn less than $120,000 are eligible to receive five percent towards the down payment of a resale home and five or 10 percent for a new home.
The incentive does have its limitations though. The maximum you could afford to spend on a home using the incentive is $565,000. That works out to four times your income plus the incentive amount. In order to qualify for a $565,000 purchase price you’d need to have a household income of $120,000 and be buying a new home. If you earn less and/or you’re buying a resale home, you’ll qualify to spend less on a home.
While it’s true that you won’t have to pay any interest on the funds that you receive under the incentive, as mentioned the government takes an equity stake in your property. If you’re a homebuyer hoping to use your first property as a stepping stone up the real estate ladder, you may have a tougher time doing so. That’s because even if your property goes up a lot in value, you’ll need to share a portion of those gains with the government.
It also remains to be seen how popular the incentive will be, especially because you can only spend up to $565,000 on a home. However, many will qualify for a lot less. In big Canadian cities, you’ll be hard-pressed to find a condo, let alone a property, for that amount. You might have to move to the suburbs or relocate to a new city or town entirely.
If you’re having difficulty qualifying for a mortgage, it may be worthwhile having a discussion with your family members and seeing if they can gift you part of your down payment or they’re willing to co-sign on your mortgage. If those aren’t options, only then is the incentive worth considering. Just bear in mind you may not end up with as much help as you’d like in Canada's larger and more expensive cities.
About The Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.
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