As housing prices continue to skyrocket, the relatively new First Time Home Buyer Incentive (FTHBI) has been gaining traction with hopefuls looking to get in on Toronto’s hot real estate market. Designed as a means to help fringe buyers get into the market by lowering up front down payments and monthly carrying costs, the program almost sounds too good to be true. Let’s dive a bit deeper to get a better understanding of how this program can help your situation, if at all.
The FTHBI is basically a shared equity proposition where the Federal Government will assist you in payments in exchange for a share of equity in your property. High level, here are some of the immediate pros and cons:
- Ability to enter the market sooner,
- lower monthly costs,
- flexibility to buy the government out at anytime, returning your equity stake to 100%,
- some level of protection to the downside with shared risks should the market turn lower,
- an incentive of up to 5% on existing properties, or 5% / 10% on pre-construction. Basically letting you buy 90%-95% of a property.
- It is shared equity – meaning until you restore your equity to 100%, the government will own a percentage of all gains. Since this is your primary residence, this would be a share of your tax free gains,
- difficult to qualify,
- difficult to find eligible properties (not really a metropolitan play),
- you are responsible for all the fees associated,
- must take a CHMC insured mortgage, and therefore responsible for penalties involved.
To qualify for the program, at least one buyer must be considered a first time home buyer in the eyes of the government, which means one of these need to apply:
- never purchased a home,
- in the last 4 yrs, did not own or occupy a home (spouse / common law included)
- has gone through breakdown of marriage or partnership.
- must be a Canadian citizen, permanent resident, or non permanent resident legal to work in Canada
Here’s where the qualifications get a bit dicey. As per program requirements below, looks like not many are going to qualify:
- Make $120,000 annually or less (combined)
- Mortgage to Income Ratio: Mortgage & Incentive value combined cannot be 4x your household income.
- Max affordability is income x 4 + deposit amount.
Looking at the perfect scenario to maximum purchasing power, you have to make exactly $120,000 a year x 4 = $480,000 to maximize your loan qualifications. In addition to that, you can add a deposit which won’t impact your Mortgage to Income ratios. For maximum purchasing power, you’d need to have a 15% deposit, which would bring your qualification limit to just under $565,000, with a $85,000 deposit, and a 5% shared equity loan.
With the prices of most 1 bedroom condos soaring past this range already, you can see how this eliminates most metropolitan units from the equation. Now let’s take a look at a more idealistic scenario. Consider a college graduate with a good job earning $90,000 and savings of $40,000.
- Max Purchase Price: $90,000 x 4 = $360,000 maximum loan + $40,000 savings = $400,000
- Mortgage to Income: 10% down w/ a 10% incentive ($320,000 Mortgage + $40,000 Incentive = $360,000 / 4 = $90,000)
In short, the most you can borrow (mortgage & incentive) is 4x your income. Add your deposit amount and you will get a ballpark figure of affordability.
As you can see, even someone earning a very respectable $90,000 a year can only afford $400,000 on the top end if you want Government help. That won’t help at all in metropolitan cities.
Let’s say you do find something in a smaller city that works for you and you meet the qualifications for the program. Here’s a look at how payback works:
- Must be paid within 25 yrs or at time of sale
- You will be required to pay the government back their equity and percentage of profits when ready
- You of course, cover the cost of any additional fees like appraisal, lawyer, etc.
- Since you can pay back anytime, better to do it before any major renos as the government would own part of that as well.
The Canadian government has done a great job in generating buzz around this program. I commend their efforts in trying to help buyers find their first home, but as you can see the program requirements at this time are still too restrictive around eligibility to be meaningful. Another variable not covered here are CHMC insurance requirements. Depending on how far below the 20% deposit threshold you are, you may be on the hook for an additional 2.8%-3.1% penalty. Considering you have to pay 3.1%, plus fees, and give up 10% equity stake in your home to take advantage of the benefits of this program, I’d suggest the FTHBI as a last resort the way it stands today.
Keep in mind, the program is likely to be an iterative one. If you are interested in getting into the market but don’t know where to start, check out our resources link and feel free to drop me a line. I’d love to chat with you about strategies, or formulate a plan of entry when the time is right.
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