The Canadian Mortgage and Housing Corporation officially announced the details for its shared equity program called the First-Time Home Buyer Incentive (FTHBI). For the first time in recent history, a government-backed program has been designed to help young middle-class buyers get into the real estate market and everyone’s wondering what’s the catch?
According to a report by Ryerson University’s Centre for Urban Research and Land Development, Millennials in the Greater Toronto and Hamilton Area are ageing into their prime working and housing demand years. There are roughly 700,000 Millennials who may be looking to move out of their parents’ home in the next decade and if you are one of them, you know there has been a lot of speculation whether this program is, simply put, good or bad and how much will you really save in the long run? Well, that’s why we’re here to break it all down for you.
Starting on September 2nd, the First-Time Home Buyer Incentive, which was first announced in the federal budget in March, is offering an interest-free loan to help homebuyers take out a smaller mortgage and keep monthly repayments low. In order for you to participate in the FTHBI, you must meet two main requirements. You must be a first-time homebuyer and you cannot have an annual income of more than $120,000. One of the biggest advantages of participating in this program is that your monthly mortgage costs will be reduced by up to $286 on a home priced up to $500,000.
Buyers must come up with their own down payment of at least 5% of the property value, while the incentive can only be applied to a mortgage greater than 80 per cent of the home’s value. This means that, for those of you who plan on putting down 20 per cent or greater, need not apply. Plus, the maximum purchase price you can aim for is four times your income in addition to the incentive amount.
Let’s Do the Math
Say you are bringing in $100,000 annually. According to calculations from rate comparison site Ratehub.ca, the most expensive home you can anticipate buying with the incentive would be $421,053.
With a five per cent down payment of $21,000 on an already existing home, the FTHBI would provide another $21,053. You can now expect your mortgage to be $378,948 instead of the $400,000 it would have been without the government top-up. This will also reduce your mortgage insurance premium to $11,748 in this example.
So what are your monthly payments looking like? Instead of $2,033 a month, your monthly mortgage payment would be $1,910. That’s a difference of $120 a month, or $1,476 a year.
With this incentive, you can rest assured that the loan would have no interest or regular principal payments. The requirement is that you must repay the loan after 25 years or when you sell the house, whichever comes first. And you can repay the loan at any time, within the 25 years, with no penalty. So what about when you’re ready to sell, you ask? Well, here’s your answer: If your home has appreciated at the time of repayment, the government gets a cut of the gain. So if we use the scenario from above, for example, and you decide to sell your home when the price has risen 10 per cent to $463,158-- you’ll have to pay five per cent of that or $23,158 to the government. Likewise, if the home value drops 10 per cent, you will only have to repay $18,948 which is 10 per cent less than what was lent to you.
Now, this incentive may not be beneficial to someone setting their sights on owning a 2 bedroom condo in Yorkville but there are options in metropolitan areas around the GTA that will accommodate this program. In fact, according to the CMHC website, around 23% of transactions in Toronto are for homes under $500,000 and based on last year’s activity, over 2,000 home buyers in Toronto would have been eligible for the FTHBI.
To learn more about properties under $500,000 in the GTA, our new interactive map allows you to search for properties by price and many other categories. Click here to get started!