This piece was originally published on December 9, 2020, and was updated on July 6, 2022.
If you’re an aspiring first-time homebuyer in Canada, you may have heard about the first-time homebuyer incentive program. It’s one of a number of federal first-time homebuyer programs in Canada that aims to help new buyers more easily afford a home.
While the incentive is an interesting program that offers a lot to people in the right situation, it has qualification conditions that limit how useful it can be. This page has everything you need to know to understand whether you can benefit from the incentive.
What is the first-time homebuyer incentive?
The first-time homebuyer incentive is a kind of interest-free loan for qualified first-time homebuyers to help decrease their regular mortgage payments. The incentive contributes up to 10% of the total cost of the home, which you’ll need to pay back within 25 years. By delaying the repayment of this interest-free amount, first-time homebuyers can save a significant amount of money over the course of their mortgage. Launched in September 2019, the first-time homebuyer incentive is offered by the Canada Mortgage and Housing Corporation (CMHC).
More specifically, the first-time homebuyer incentive is a shared equity mortgage. That means the CHMC will technically be a part-owner of your home, although you’ll have exclusive access to it. There’s more detail on the technicalities of shared equity mortgages below.
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How does the first-time homebuyer incentive work?
The first-time homebuyer incentive sees the CMHC pay for up to 10% of the cost of your first home, as part of a shared equity mortgage. The incentive provides 5% of the purchase price for an existing home or 10% for a newly built home. The additional contribution will lower the cost of your regular mortgage payments.
Example: With a $400,000 mortgage, a 2.5% fixed rate, and a 25-year amortization, your monthly payment would be around $1,792 (Source: Ratehub Mortgage Payment Calculator). With the CMHC covering 10%, your new mortgage would be $360,000, with a new monthly payment of $1,613. That’s a saving of $179 per month.
A shared equity mortgage means that a second party – in this case, the CMHC, a branch of the federal government – shares ownership of the home, based on how much they invest. With the full 10% of the first-time homebuyer incentive, that would mean the CMHC owns 10% of your home. However, the incentive provides you exclusive access to the home – you won’t need to share 10% of it with the government!
You’ll need to pay back the CMHC contribution within 25 years or when you sell the home, whichever comes first. While the incentive amount is interest-free, the amount of money you’ll need to pay back will fluctuate alongside the value of your home.
Example: If you bought a home worth $500,000 today, a 10% CMHC contribution would be $50,000. However, if you pay back the CMHC contribution when the house has grown in value to $750,000, that 10% figure would be $75,000. That’s how much you’d need to pay back.
Basically, you’ll have to pay back the percentage borrowed (5% or 10%) of the value of the home at the time you sell or pay back the incentive. You’ll pay more than you initially borrowed if the home increases in value, less if the home depreciated.
Sounding pretty good so far? Unfortunately, the first-time homebuyer inventive is not without its flaws.
Qualifying for the first-time homebuyer incentive
One of the weaknesses of the first-time home buyer inventive is the range of restrictions put in place on who can use it, and on what kind of homes it can be used. Here are the four main requirements for qualifying for the first-time homebuyer incentive.
First-time homebuyer: You need to be a first-time homebuyer to be eligible. This is a pretty obvious rule, considering the name of the program! For this program, a first-time homebuyer is defined as never having owned a home anywhere in the world, and to not have lived in a home owned by their spouse or common-law partner in the last 4 years.
Household income: Your household income must be less than $120,000 to qualify. That means you and your partner’s income (if you have a partner) must be less than $120,000 combined. The current average income in Canada is around $55,000, so while most people will still be eligible with this rule, it doesn’t leave a lot of wiggle room.
Minimum down payment: You must have the minimum required down payment saved in cash. For properties worth less than $500,000, that’s 5% of the overall property price. For homes worth between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the rest. The incentive amount is not counted as part of the down payment.
Four times your income: The maximum amount you’re able to borrow is four times your qualifying income. That means the maximum amount you can borrow and still be eligible for the incentive is $480,000, and that’s only if you earn exactly $120,000 a year. This is the most restrictive requirement, as it significantly limits the number of mortgages that will be eligible for the incentive, especially in Canada’s more expensive cities, like Toronto, Vancouver and Calgary.
Taken together, these restrictions seriously limit the number of Canadian first-time homebuyers that are actually eligible for the incentive. Not only will they have to earn close to an average income, but they will need to buy a very modestly priced home compared to their earnings.
The bottom line
So, is the first-time homebuyer incentive right for you? Well, maybe. Firstly, you’ll need to decide whether you are eligible for the incentive. Then, crunch some numbers to determine your mortgage affordability with and without the incentive. If you want to buy a home that’s more expensive than the maximum allowed under the incentive, then it might not be for you. On the other hand, understanding the different options available to you might influence your purchasing decision.
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 – that can help reduce the financial burden of your first mortgage. It’s best to speak to a mortgage broker to determine whether or not the first-time home buyer incentive is right for you.
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