The first-time home buyer incentive (an overview)
by September 16, 2019 / No Comments

If you’re an aspiring first-time home buyer in Canada, you’ve likely heard about the recently launched first-time home buyer incentive program. It’s the latest first-time home buyer program in Canada that aims to help new buyers more easily afford a home.  

So, what is it and how does it work? Let us explain. Here’s everything you need to know.

What is the first-time home buyer incentive?

Launched on September 2, 2019, the first-time home buyer incentive is a program by the Canada Mortgage and Housing Corporation (CMHC) that provides an interest-free loan to qualified first-time home buyers who wish to top up their down payment amount. 

The purpose is to provide larger down payments to first-time buyers, which will lower their monthly mortgage costs.

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How does the incentive work?

The first-time home buyer incentive program provides up to 10% of the purchase price of a home to eligible buyers in the form of an interest-free loan. The additional 10% down will lower the mortgage carrying costs for buyers, making the house they buy more affordable.

However, there are certain stipulations to the loan – specifically around when it has to be repaid and who can qualify for the incentive.

Who can qualify for the incentive?

There are four main criteria for qualifying for the first-time home buyer incentive.

  1. The borrower’s qualifying household income must be less than $120,000. 
  2. The borrower must be a first-time home buyer
  3. The borrower must have at least 5% saved as a down payment — the minimum down payment required to purchase a home in Canada. The total a buyer can put down cannot exceed 20% of the purchase price.
  4. The borrower is only eligible to borrow less than four times their qualifying income

While the loan is interest free, it’s a shared equity loan. That means the loan amount will fluctuate based on the home’s value because the government, in sharing the equity in the home, is essentially a part owner. 

Through the program, the government will loan a home buyer 5% of the purchase price for a resale home or 10% for a new home.  The buyer has to repay the loan either when they sell their home or after 25 years, whichever comes first. However, they don’t make ongoing payments on the loan nor do they pay interest.

They do, however, have to pay back the percentage borrowed (5% or 10%) of the value of the home at the time of sale. That means they will pay more than they borrowed if the home has increased in value over the term of the loan (and less if the home depreciated). 

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Is the incentive right for you?

It might be. Your best bet is to crunch some numbers to determine your own affordability with and without the incentive. Calculate scenarios to figure out how much you might have to repay, taking into account home price fluctuations and when you plan on repaying the loan. 

Of course, it’s impossible to accurately predict future home prices – and, therefore, how much the incentive will actually cost you. There are also other options to consider, like a joint mortgage, if you’re struggling with buying the home that you really want. It’s best to speak to a mortgage broker to determine whether or not the first-time home buyer incentive is right for you.