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The New First-Time Home Buyer Program: What It Could Mean For You

The 2019 Federal Budget was announced last week. Since then, it has been the talk of the town, and has been received with mixed reviews.

 

Some think it could be good for the market, by reducing the mortgage amount needed. On the other hand, some feel the average pricing in the city could render the program useless.

For those who have read about it, you likely have gotten the gist – but what does it really mean for you as a prospective buyer?

I outline some of the major keys of the program below. I’ve also added my perspective on some of the specific requirements to help with the discussion when the program comes into effect.

 

Only applies to insured mortgages

Why this is important: It won’t apply to you if you’re putting more than 20% down.

An insured mortgage only applies if you’re putting less than 20% down and for purchase prices for under $1,000,000. If you’re planning to put more than 20% down (or buying a $1,000,000 as your first home), this incentive will unfortunately not be available for you as your mortgage will not be insured.

At the end of the day, a higher down payment will result in lower mortgage payments and less total interest paid in the long run. You’re definitely better off with 20% down, but if you’re having trouble getting to it, the program will definitely help you.

 

Eligible for households with less than $120,000 in annual income

Why this is important: If you have over average career, you may not qualify for the program.

The incentive aims to assist middle-income Canadians, so the threshold of $120,000 is ideal. As per Stats Can, the average employment income for Canadians aged 25 – 34 is approximately $44,000. Introducing a dual income household, that is about 88,000, which is still eligible for the incentive. If you’re the average Canadian millennial, this could be an attractive option.

On the other hand, Toronto has grown to be somewhat of a tech hub of Canada. It may provide an increasing number of higher paying jobs for young professionals. This may work against the program.

 

Mortgage + CMHC incentive will have a cap of 4 times the annual income (max home of about $500,000)

Why this is important: The average condo price in Toronto is at least $600,000(based on February 2019 market stats), these purchase prices may not even qualify.

The program will cap out with an insured mortgage of 4 times the annual household income. Considering the max income to qualify is $120,000 x 4 = $480,000 + at most 10% CMHC incentive, you’re looking at a home of approximately $500,000.

Considering that, some first-time buyers may need to compromise. Factors such as location, parking, or upgrades may need to be foregone to stay within the program criteria as prices continue to rise in the Toronto, especially the core.

 

Incentive could be up to 10% of the purchase price and would be provided by the CMHC, it’s unclear of how you would be paying back the CMHC.

Why this is important: It’s uncertain if the CMHC will have 10% equity, or if they’re just assisting up to 10% of the value at the time. This is important when it’s time to buy back your 10%.

The incentive would provide up to 10% of the purchase price to help reduce the amount of mortgage you would need to take out.

For example, say you’re hoping to buy a $400,000 home with the minimum required five per cent down payment, which works out to $20,000. With the new incentive, you could receive up to $40,000 through the CMHC. Now, instead of taking out a $380,000 mortgage, you’d need to borrow only $340,000. This would lower your monthly mortgage bill from over $1,970 to less than $1,750. (Credit: https://globalnews.ca/news/5069183/budget-2019-canada-housing-affordability/)

Will this mean that the CMHC would have 10% equity in your home? If so, when the value of your home goes up, will you only need to repay $40,000 (as per the above example), or 10% of the future value? These are some of the questions being asked right now.

It’s too early to really understand how it will all work, but it’s good to understand what it could potentially mean for you as a buyer. All we know is the amount provided by the CMHC would have to be paid back in one form or another, but it is still unclear of when (it’s anticipated pay back will happen at re-sale).

 

Homebuyers Plan gets a boost of $10,000, from $25,000 to $35,000

Why this is important: The HBP must still be paid back in 15 years – you’ll be paying back more than you might expect over that time.

For those who may not know about the Homebuyers Plan, it is a program where you can use up to $25,000 of your RRSP’s towards the purchase of your first home. The caveat: you must pay it back into your RRSP within 15 years, or else the amount you have taken out becomes part of your taxable income (meaning you will have to pay taxes on it).

Given that fact, the increase of the HBP may increase monthly expenses. You would be paying back more over the same period of time if you take advantage of this program.

Some also feel that this may boost demand as people will have more available cash to use for their purchase. This in turn could driving prices even higher, which is counterintuitive to the entire program.

 

Overall, it’s excellent to see the federal government is taking notice. It’s equally great that they’re attempting to provide support to the middle-income Canadians who wish to purchase their first home. Though there are still some unanswered questions, there will definitely be a reaction in the market when this is in place.

Will it be in the positive direction like intended, or will it create little change for some of the new generation ready to get into the market? I guess only time will tell.

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