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New home buying incentive decreases maximum purchase price buyers can qualify for

Confused about the new mortgage incentive the Liberal government announced Tuesday? Don’t worry, we were too — and we live and breathe this stuff. We’ve been discussing it among our mortgage team all day and have come to the conclusion this policy actually hinders first-time homebuyers who use it because it decreases the maximum purchase price they can qualify for. Let us explain.

But first, some background.

As mentioned, the Liberals unveiled their latest budget earlier this week — its final before the upcoming federal election. It includes two programs specifically aimed at first-time homebuyers: A new RRSP Home Buyers’ Plan and a new down payment assistance program, called the First-Time Home Buyer Incentive.

The first program is pretty straight forward. The second one, though, flummoxed the industry.

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Full details of this program have yet to be released, but the government said it is willing to provide up to 10% of the purchase price of a new construction dwelling and up to 5% of a resale in the form of a loan.

However, it raised some questions. Will it be an interest-free loan to be repaid at the same amount? Will it allow the government to take an equity position in homes, essentially giving it part ownership, and a growing stake in the home as its price increases?

Turns out it’s the latter, which will be offputting to many buyers.

In addition to allowing the government part ownership of their home in exchange for down payment assistance, it also decreases the maximum price a first-time homebuyer can qualify for.

“The current qualifying criteria, including the stress test, allows a household to qualify for a house that is 4.5-4.7 times their household income,” James Laird, president of CanWise Financial, said.

However, the new incentive program stipulates “ … participants’ insured mortgage and the incentive amount cannot be greater than four times the participants’ annual household incomes.”

Under the new First-Time Home Buyer Incentive, the government has set a purchase limit of four times household income for the mortgage plus the amount provided by the government.

This means that at all income levels, participating in the government’s new program reduces the amount a first-time homebuyer can qualify for. By participating in this program, a first-time homebuyer reduces the amount they can qualify for by about 15%, according to our calculations.

Let’s break it down.

A household with $100,000 income, putting a minimum down payment of 5% (23,994.40), can currently qualify for a $479,888 purchase. The total mortgage amount with CMHC insurance would be $474,129.34 ($2,265.75 monthly mortgage payment).

The maximum purchase price for the same household, if they participate in the First-Time Home Buyer incentive, drops to $404,858.29 when using the same minimum down payment (5% at $20,242.91). The total mortgage amount would then be $400,000.

If the person took a 5% incentive (which is available for resale homes) from the government their mortgage amount goes to $378,947.37, and the monthly payment is now $1,810.90.

If the person took a 10% incentive from the government (for new homes) their mortgage amount goes to $357,894.73 and the monthly payment is now $1,710.29.

So, a buyer who takes advantage of the new incentive would actually have a harder time qualifying for a home than one who refuses the government’s help.

Sure, the monthly payment decreases but at what cost? Remember, the bill for the loan will come due when a buyer sells the home or pays it off — and it will include any price appreciation the home may have had.