First Time Home Buyer Incentive – Everything you need to know
The Federal Government’s newly launched First Time Home Buyer Incentive (FTHBI) aims to make home buying more affordable for first time home buyers. The Government of Canada has allocated $1.25 billion over three years (starting in 2019) for this program.
This incentive from the Government of Canada provides
- 5% or 10% for a first-time buyer’s purchase of a newly constructed home
- 5% for a first-time buyer’s purchase of a resale (existing) home
- 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
Who is a first-time home buyer?
Before we get into the eligibility criteria for the incentive, let’s understand if you are a First Time Home Buyer. First-time home buyers are not just the people who have never owned a home before.
This program also applies to homeowners who have gone through a divorce or breakdown of a common-law partnership, or those who have not lived in a home that they owned (or that was owned by their spouse or common-law partner) for the past four years.
Eligibility Criteria for First Time Home Buyer Incentive
Who can apply?
Canadian Citizens, Permanent Residents and non-permanent residents who are legally authorized to work in Canada.
How does it work?
If you consider yourself eligible based on the above-mentioned requirements, you can apply for the incentive. It comes in the form of a shared equity mortgage with the Government of Canada.
It is called as shared equity as the Government shares the gains or losses on the property when you eventually sell it. You have to repay the incentive after 25 years or if the property is sold, whichever happens first.
This is an interest free loan from the Government, and it does not require any monthly payments too. You will only pay back the Government when you sell the property. The payback is calculated as a percentage of the selling price.
If you received a 10% loan when you bought the house, you will payback 10% of the property value to the Government when you sell the house.
Advantages of FTHBI
- The main advantage of this federal incentive program is that it makes home buying more affordable. Monthly savings on mortgage payments can vary between $100 to $300.
- The first-time home buyer has to come up with the minimum down payment of 5% from his savings, RRSPs, non-payable financial gift from relatives etc. The Government will add 5% or 10% depending on the property type thereby decreasing the amount that has to be borrowed.
Added bonus: Unlike some types of loans, there are no prepayment penalties with the First-Time Home Buyer Incentive. That means if you want to pay it back early, you won’t get hit with any prepayment fees. If you come up with a big chunk of money from an inheritance or a raise or a lottery winning, you can consider prepaying the loan.
It’s important to know that when you pay back your incentive, you’ll be paying it back to Canada Mortgage and Housing Corporation — not your mortgage lender.
Disadvantages of FTHBI
- The buyer loses an equity interest in their home, equivalent to the % of interest free mortgage loan granted by the Government under this program. So, if a buyer’s property qualifies for a 10% interest free incentive, it means that the buyer owns 90% of the property and the Government owns the rest.
- If the family’s qualifying income is over $120000, they will not be able to avail the FTHBI even if they are a first-time home buyer.
- Since this is not a grant or subsidy from the Government, it has to be ultimately paid back at the end of 25 years. If you are planning to live in the same property, you will need to pay back the 5% or 10% of the property’s fair market value at that time. This can be a hefty sum depending on how the market appreciates.
What type of properties can you buy?
Assuming that you are qualified as a first-time home buyer, the second step is to verify if the property you are looking to buy is qualified too.
Both new construction and re-sale homes are eligible, including:
- Single family homes
- Semi-detached homes
- Duplex, triplex, and fourplex
- Town houses
- Condominium units
- Mobile/manufactured home
Since the program is designed to help the first-time home buyers who intend to occupy the property, investment properties are not eligible. So, vacation properties or secondary homes are not eligible.
Needless to say, this property has to be in Canada and must be suited for year-around occupancy.
If you are applying for the first-time home buyer incentive, you need to be keep the following additional costs in mind.
- Extra Legal Fees : As your lawyer is closing two mortgages instead of one, you may be charged with additional fees.
- Appraisal Fees : When you are repaying the incentive, you need to get an appraisal done to calculate the fair market value of the property.
Let’s look at an example
Jeff wants to buy a new home for $450,000 and has saved the minimum required down payment of $22,500 (5% of the purchase price).
Under the First-Time Home Buyer Incentive, Jeff can apply to receive $45,000 in a shared equity mortgage (10% of the cost of a new home) through the program.
This lowers the amount Jeff needs to borrow and reduces the monthly expenses.
As a result, Jeff’s mortgage is $235 less a month which equates to savings of $2,820 a year.
Ten years later, Jeff sells the home* for $550,000. The Incentive will need to be repaid as a percentage of the home’s current value.
This would result in Jeff repaying 10%, or $55,000 at the time of selling the house.
On the other hand, if Jeff’s home decreases in value to $420000, he has to pay back $42000 (10%) when he sells the house.
*The sales figures are for explanation only. They are not an indicator of how property values are forecasted.
Are you a first-time home buyer looking to make use of the FTHBI? I can help you realize your dream of owning your first home in Canada. Let’s meet for a coffee and understand more about your goals.