Everything you need to know about the First-Time Home Buyer Incentive
Not sure if the First-Time Home Buyer Incentive is right for you? We’ve got the answers to your questions!
Back in March, the 2019 federal budget announced changes that affected home buyers. These new measures aim to support buyers and improve affordability for Canadians who are ready to own a home. One of these new measures is the “First-Time Home Buyer Incentive”, which the federal government launched on September 2, 2019.
What is the First-Time Home Buyer Incentive?
This incentive helps Canadians obtain financial aid from the Canada Mortgage and Housing Corporation (CMHC). The CMHC will provide homebuyers with financing of 5% for resale homes and 5% or 10% for new constructions. This money is a loan that goes towards the down payment of a home, lowering the monthly mortgage payments.
While this all sounds great, we know that there’s no such thing as a free lunch.
So, here’s everything that you need to know about the incentive before you buy a new home.
Am I eligible?
All Canadian citizens, permanent residents and non-permanent residents who are legally authorized to work in Canada can apply for the program.
To be considered eligible, applicants must be a first-time homebuyer. This definition also includes individuals who have gone through a “breakdown of marriage or common-law partnership” or who didn’t live in a home that they owned in the past four years.
Other eligibility requirements include:
- Your qualifying income is less than $120,000. This includes the annual salary as well as any investment or rental income. It is also the total income of the application, whether you’re applying by yourself or with a spouse, family member, or friend.
- You have at least the minimum down payment. The minimum down payment is 5% for the first $500,000 and 10% for any amount over $500,000.
- Your total borrowing amount is less than four times your qualifying income. Since the maximum qualifying income is $120,000, the maximum amount to anyone can borrow is $480,000.
It’s important to note that only CMHC insured mortgages are eligible. This means that buyers must have a down payment of less than 20%, including the First-Time Home Buyer Incentive amount.
Have more than 20% saved? Check out our mortgage tips for first-time homebuyers.
How does it work?
If you qualify for the incentive, the Government of Canada will provide you with a loan in the form of a shared equity mortgage. This means that the government will own a portion of your home and will share in the gains or losses of its value.
When do I have to pay back the loan?
The incentive is an interest-free loan to which the borrower does not need to make any ongoing payments. Instead, the loan must be repaid either when the home is sold or after 25 years, whichever happens sooner. You can also repay the incentive at any time without a penalty.
How much do I need to repay?
You need to repay the percentage you borrowed (5% or 10%) on the home’s fair market value at the time of repayment, rather than the amount borrowed. So, if your home goes up in value, you will need to pay back more than you borrowed. If your home goes down in value, then you will pay back less than you borrowed.
For example, you received an incentive of 5% for a $500,000 home ($25,000). If the value of the home increases to $600,000, then you repay 5% of the current value ($30,000). If the value decreases to $400,000, then you repay 5% of the current value ($20,000).
For this reason, it may be advisable to repay the incentive early if you are planning any renovations. While the government does not share in the cost of the renovation, it will benefit from any appreciation in the home’s value.
Will it really save me money?
With the incentive, you are able to increase the amount of your down payment, which lowers the amount of insured mortgage needed to buy the home. This means that you will pay a lower insurance premium and a lower monthly mortgage payment.
Using our mortgage calculator for the example above (assuming an interest rate of 5.19% and a 25-year amortization period), the monthly payment is $2,814.22 without the incentive and is $2,666.11 with the incentive. This means, that you will save $148.11 per month.
Is the First-Time Home Buyer Incentive right for me?
As with any decision, it’s important to consider the risks and rewards. Now that you have a better understanding of the program, you can make an informed decision about whether it’s right for you.