If you’re in the market to purchase a home and qualify as a first-time home buyer, the Government of Canada offers an assistance program you might want to consider. The program is called the First-Time Home Buyer Incentive. Introduced in 2019, the program aims to make homeownership more achievable and affordable for first-time buyers across the country.
What is the First-Time Home Buyer Incentive?
The First-Time Home Buyer Incentive (FTHBI) is an assistance program introduced by the Government of Canada in which the government infuses 5% or 10% of the value of the home as equity. This type of shared-equity scheme essentially reduces the mortgage payments for a home buyer by reducing the amount that is availed as a mortgage loan from a lender.
The homeowner would have to repay the government within 25 years or when the home is sold, whichever comes first. Through this arrangement, the government essentially becomes a stakeholder in the value of the property and makes a profit or loss depending on the market value of your home.
The following types of properties qualify for the FTHBI, with different levels of assistance for each type:
- Newly built home: 5% or 10% of the home’s value can be used as a benefit
- Purchase of a resold existing home: 5% of the home’s value can be used as a benefit
- Purchase of a new or resold mobile/manufactured home: 5% of the home’s value can be used as a benefit
Examples of how the FTHBI would work in practice
Suppose you are interested in purchasing a newly built home valued at $450,000. The eligible benefit can be either 5% or 10% of this value. In terms of dollars, this would equal $22,500 or $45,000.
If you have saved 5% or $22,500 for an initial down payment and use 5% of the incentive, your total down payment can now be $45,000 ($22,500 from yourself plus $22,500 from the government).
If you place 10% down and use 5% of the incentive, your total down payment would be $67,500 ($45,000 from yourself plus $22,500 from the government).
Let’s consider some different scenarios that will help us understand the impact of the incentive on your monthly mortgage payments. For the sake of simplicity, we have ignored any other expenses, such as legal, mortgage insurance, and appraisal costs. In each scenario, we assume an interest rate equal to 2.5% with a 25-year amortization period, and a purchase price of $450,000.
Scenario 1: No FTHBI benefit; only a 5% down payment is paid.
Essentially, this means that we would have to take out a loan of $427,500, since only the down payment, of $22,500, is deducted from the total value of the property. Using an online mortgage calculator, the required mortgage payment at the end of each month would be $1,915.
Scenario 2: Using a 5% FTHBI benefit (i.e., $22,500 is availed from the FTHBI) and a 5% down payment from yourself.
The total down payment would be $45,000: $22,500 from your down payment and another $22,500 from the FTHBI. The loan amount would be $405,000 after making these adjustments. Your mortgage payments would now be $1,814.
Scenario 3: Using a 10% FTHBI benefit (i.e., $45,000 is availed from the FTHBI) and a 5% down payment from yourself.
The total down payment made to the lender would be $67,500: $22,500 from your down payment and another $45,000 from the FTHBI. The loan amount would now be $382,500, and the mortgage payments would be reduced to $1,713.
You can see that your monthly mortgage payments are reduced as a result of using the First-Time Home Buyer Incentive. By taking a 5% FTHBI benefit, your monthly payments are reduced by $101, and by taking 10%, the reduction is a further $102. This may not appear to be a large amount, but in the context of a 25-year loan, the savings can be quite significant.
The repayment to the government must be made within 25 years or when the home is sold. There is a catch, however. The amount that must be repaid is based on the market value of the property. If you used the 10% benefit, and the value of the property rose to $550,000, the repayment amount would be $55,000. In our case, where the government put in an initial stake of $45,000 (10% of the initial purchase price of $450,000), it would earn a profit of $10,000 (10% of the profits of $100,000).
Likewise, if the value of the property goes down to $400,000, then the repayment would be $40,000, and the government would lose $5,000.
Who qualifies for the First-Time Home Buyer Incentive?
Certain criteria must be met before a home buyer becomes eligible for this incentive. The person purchasing the house must be a new buyer. Only the following people can fall under this category:
- Someone who has not bought a home before.
- Someone who has not resided in the home of their common-law partner or current spouse within the last 4 years.
- Someone who has faced a marriage breakdown or separation from a common-law partner. In this case, the first two points of criteria can be overlooked.
There are additional criteria based on the financial position and citizenship of the home buyer. These include:
- The home buyer must be a citizen, permanent resident, or non-permanent resident with a work permit.
- The qualifying income—that is, income from salary, investments, and other sources—must not be more than $120,000.
- The maximum amount that can be borrowed is four times the annual qualifying income.
- The home buyer must provide the minimum down payment for the property to be purchased. The FTHBI is a top-up to the amount that must be paid by the buyer.
What are the benefits of the FTHBI?
The First-Time Home Buyer Incentive has many advantages for home buyers. By infusing 5% or 10% equity into your home, the government is buying a stake in the property. This means that the home buyer does not have to risk their entire capital in the property when buying a home. As seen in the previous scenarios, mortgage payments can be reduced by opting for this incentive, thereby improving cash flow for the buyer.
Home buyers also have the flexibility to repay the incentive amount whenever they want, subject to a time limit of 25 years. In addition, this amount is not fixed and is based on the market value of the property. If there is a loss, therefore, some of it is absorbed by the equity used through this scheme.
What are the potential downsides of the FTHBI?
While the government absorbs some of a potential loss in value, it also claims a stake in any increase in value. The market value could be boosted by renovations or other repair work, which may not be deducted when appraising the value of the property. There may be additional costs for those using this program. For example, someone looking to refinance their mortgage may incur additional appraisal expenses on account of the FTHBI.
By capping the amount that can be borrowed (four times the qualifying income), the FTHBI also adds an additional layer of difficulty for some home buyers. For someone with an income of less than $120,000, property availability might be low.
How do I apply for the First-Time Home Buyer Incentive?
The application process for the First-Time Home Buyer Incentive is quite simple. Once the home buyer qualifies for a mortgage loan and can use this benefit, they simply need to complete a couple of forms to apply for the program and then submit them to the lender.
The first document is an information package that provides details about the incentives, and by signing it, the home buyer acknowledges that they have read all the information and that they meet the eligibility criteria.
The second document allows the Program Administrator—namely, the Government of Canada and the Canada Mortgage and Housing Corporation (CMHC), along with the First Insured Lender—to obtain the necessary information about the home buyer.
The First-Time Home Buyer Incentive is a valuable program for many Canadians looking to purchase their first home. It can provide that extra boost and financial cushioning to take on the financial responsibility of home ownership. If you qualify for the FTHBI, speak to your mortgage lender or mortgage broker. Many lenders will help guide you through the FTHBI application process and help administer the benefit to your down payment.