Will the CMHC’s First Time Buyer Incentive help you buy a home?June 20, 2019
The federal government wants to make home ownership more affordable for young people and to do that it’s introducing the First-Time Home Buyer Incentive (FTHBI) in September. The $1.25 billion program, announced as part of the March federal budget, involves the government buying equity stakes in homes purchased by qualified home buyers, allowing for smaller mortgages that will keep monthly payments lower. But how does it all work? Will it help first-time homebuyers in Toronto?
How the First-Time Home Buyer Incentive works
The program will be administered by Canada’s housing agency, Canada Mortgage and Housing Corp. (CMHC), which will pay 5% of the purchase price for an existing home, and up to 10% for the value of a new home, in exchange for an equity stake. Once the homeowner sells, they’re obligated to repay the CMHC.
- To qualify, you must be a first-time home buyer.
- Buyers must have a down payment of at least 5% of the total purchase price, up to 20%.
- Only insured mortgages will be eligible, meaning this will be restricted to those with a down payment worth less than 20% of the purchase price.
- The household’s income must be under $120,000, and the mortgage and incentive amount together can’t be more than four times the household income.
- Buyers will not be exempt from federal “stress test” regulations (a mandatory mortgage qualification using the five-year benchmark rate published by the Bank of Canada or the customer’s mortgage interest rate plus 2%)
Who is the FTHBI for?
The program is for purchasers looking for a starter home but aren’t able to afford the monthly payments needed for a mortgage below $500,000. To qualify for mortgages in the $400,000 – $500,000 range, the household income would have to be close to six figures. Buyers would have to be willing to give up at least 5% of the value of their home to the federal government in exchange for lower monthly payments.
As an example, a couple earning up to the household income cap of $120,000 with a down payment of 5% on a new home would be entitled to an additional $48,000 provided by CMHC, as below:
As both the household income and total purchase price are capped under the program, it’s worth noting that buyers with good credit and low debt might actually be able to borrow more money than the FTHBI would allow.
In this scenario, “the program forces you to buy less home than you otherwise would be able to. Whether consumers are disciplined enough to take part of that or not is the real question,” says Paul Taylor, president and CEO of Mortgage Professionals of Canada.
Buyers in the program will also want to consider the future value of their home over time. Is the neighbourhood likely to increase in value? With a 5-10% equity stake in the home, CMHC will be along for the ride, both in the case of depreciation or appreciated value of the home.
The Toronto Market
The most expensive home you can buy would be about $565,000 a government official told the CBC, which all but disqualifies purchases of a home or large condo in downtown Toronto. For example, the average home price in the Greater Toronto Area as of May 2019 was $838,540, according to the Toronto Real Estate Board.
CMHC acknowledged earlier this year that the average home in these markets won’t be within reach.
“It may not be a condo in Yaletown or a house in Riverdale, but there are options in both metropolitan areas to accommodate this program,” CMHC said in a press release in April. “In fact, around 23% of transactions in Toronto are for homes under $500,000.”
This means that potential buyers will want to be comfortable living in the outer suburbs of Toronto.
What can you find for under $505,000 in the GTA
While this program can get you property up to $565,000 if you put the maximum down payment allowed for an insured mortgage (about 19.99%), we expect many who use this program will have the minimum 5% down payment and are looking to get into the property market sooner with help from the CMHC.
Here’s an example of what you might be able to get:
If you would like to explore more options email us at email@example.com.
Article adapted from www.lowestrates.ca