For the past year and a half, real estate experts across the country have lamented the fact that the federal government’s mortgage stress test has made it more difficult for some people to buy a home in Canada since it was introduced January 2018.
The numbers tell the tale with MLS transactions struggling in many markets including Calgary.
Experts say this has particularly been hard for first-time homebuyers.
Earlier this week, the federal government announced details of the First-Time Home Buyer Incentive program which it says will help middle class families take their first steps towards homeownership. It will do this, starting September 2, by reducing monthly mortgage payments required for first-time homebuyers without increasing the amount they need to save for a downpayment.
“Through the National Housing Strategy, more middle-class Canadians – and people working hard to join it – will find safe, accessible and affordable homes. Our proposed measures will reduce the monthly mortgage for your first home by up to $286. This will mean more money in the pockets of Canadians and will help up to an estimated 100,000 families across Canada,” said Jean-Yves Duclos, Minister of Families, Children and Social Development and Minister Responsible for Canada Mortgage and Housing Corporation.
Here are some key points of the new program:
- The incentive will help qualified first-time homebuyers purchase their first home as it reduces their monthly mortgage payment, without increasing the amount that they must save for a down payment;
- The incentive will allow eligible first-time homebuyers who have the minimum down payment for an insured mortgage with CMHC, Genworth or Canada Guaranty, to apply to finance a portion of their home purchase through a form of shared equity mortgage with the Government of Canada;
- For the purchase of an existing home, an incentive amount of five per cent may be available. For the purchase of a newly-constructed home, an incentive amount of five per cent or 10 per cent may be available.
- No on-going repayments are required, the incentive is not interest bearing, and the borrower can repay the incentive at any time without a pre-payment penalty;
- The government shares in the upside and downside of the change in the property value;
- The buyer must repay the incentive after 25 years, or if the property is sold;
- The incentive will be available to first-time homebuyers with qualified annual household incomes up to $120,000. At the same time, a participant’s insured mortgage and the incentive amount cannot be greater than four times the participant’s qualified annual household income; and
- For example, for a family buying a $500,000 home, this program could save them as much as $286 per month or more than $3,430 a year.
“The First Time Home-Buyer Incentive is designed to benefit those who need more assistance with housing costs, middle class Canadians. Thanks to mortgage payments that are more affordable, many families will have hundreds of dollars more each month in their pockets – money to spend on things like healthy food, sports activities for their kids, or even save for the future,” said Bill Morneau, Canada’s Minister of Finance.
Here is a specific example offered by the government on how it would work.
Anita wants to buy a new home for $400,000.
Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program. This is on top of the minimum required down payment of $20,000 (5% of the purchase price) from her savings.
This lowers the amount she needs to borrow and reduces her monthly expenses.
As a result, Anita’s mortgage is $228 less a month or $2,736 a year.
Years later, Anita has sold her first home for $420,000. At this time, she would now have to repay the original incentive she received as a percentage of her home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling her house.
The federal government also has other initiatives to entice first-time buyers into the market including raising the withdrawal limit of RRSPs from $25,000 to $35,000 to go towards the downpayment of a home.