Assuming that our upcoming federal election (or anything else for that matter) does not change anything, we can count on the new first time home buyer incentive program to begin accepting applications on September 2, 2019 (with the first available closing date of November 1, 2019).
The new incentive will assist first time home buyers by loaning them 5% of the purchase price of a re-sale home (or 5% or 10% of a newly constructed home). The loan will appear on title as a second mortgage in favour of the Government of Canada, and there will be no interest payment or any requirement to paydown the mortgage until the earlier of the sale of the home, or 25 years. At the time of repayment, the Government will benefit (or suffer) from any market value gain (or loss) because the borrower will repay the borrowed percentage of the home’s value back, not the original loan principal. This is a shared equity mortgage.
Of course, there are certain limiting factors to bear in mind:
- The borrower’s maximum qualifying income is $120,000 annually. Total borrowing can only be a maximum of 4 times the qualifying income. So, for example, if your qualifying income (total for all borrowers) is $120,000 then your maximum mortgage plus incentive amount would be $480,000, making the maximum purchase price $533,333 if your down payment is 5%.
- In the GTA, these maximums eliminate a lot of housing from qualifying for this incentive, but there are still some areas, such as in Durham Region where I am located, where you may be able to find a home within these parameters.
- At least one of the borrowers must be a first-time home buyer, as per the Government’s qualifications.
- For simplicity I will stop at these main points, but there are further details that may impact you. See the Government’s article here: https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm
Here’s an example calculation to illustrate how this may work for a re-sale home:
If the borrower’s qualifying income (annual total for all borrowers) is:
Then the maximum mortgage plus incentive allowed is 4 x $120,000:
And then the maximum purchase price, assuming a 5% down payment (so $480,000 is 95% of the purchase price), would be $480,000/95%:
So the borrower/purchaser’s down payment of 5%:
And the purchaser borrows 5% under the incentive program:
And the first mortgage amount required will be:
In this example, the purchaser/borrower is borrowing $25,263 without paying any interest on this amount, which, based on today’s mortgage interest rates, could save you $100 – $150 per month in mortgage payments (depending on the rate).
Let’s say that the borrower then sells the property 5 years later for $615,000. The amount paid back to the Government will be 5% of $615,000 = $30,750.
If, for some reason, the market value of the property has dropped at the time of the sale to $450,000, then the borrower would pay back to the Government 5% of $450,000 = $22,500.
Note: This example is for illustrative purposes only and should not be relied upon as financial advice.
This federal incentive is available to all qualifying residents in Canada and may very well be helpful across the country. But for those of us in the Greater Toronto Area, it will be interesting to see how many first time home buyers will actually be able to take advantage of this new incentive, given the restrictive parameters for the purchase price of the home.
Also, it’s worth mentioning that we already have a few other incentives for first time home buyers. Here is a brief summary:
- Land Transfer Tax Rebate: assuming that you qualify (please double-check the criteria in the website provided), the rebate would be up to $4,000. For example, based on a purchase price of $500,000, the land transfer tax would be $6,475 and the rebate would be applied immediately on closing, so you would only pay $2,475 for Land Transfer Tax on closing ($6,475 – $4,000). Here is the government bulletin with more info, where you can check if you qualify: https://www.fin.gov.on.ca/en/bulletins/ltt/1_2008.html
- Home Buyer’s Plan is a program that allows you to withdraw up to $25,000 in a calendar year from your registered retirement savings plans (RRSPs). The 2019 federal budget has proposed to increase this limit to $35,000. Here is the government website for more info: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html
- Federal Income Tax Credit: For the 2018 tax year first time buyers were able to claim $5,000. Of course, the government could cancel this tax credit at any time. Here are the details: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-369-home-buyers-amount.html
If you have any questions about this article or about real estate in general, I’d be happy to help.