What is the CMHC First Time Home Buyer Incentive?
The CMHC First Time Home Buyer Incentive is a program that helps qualified first time home buyers purchase a home through an interest free loan and reduced mortgage payments. The program reduces the financial burden in purchasing a first home.
The First Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada, which means the home buyer and the government both own the mortgage together. It is a shared investment between the two parties. The home buyer puts in a percentage of the mortgage and the Government of Canada puts in a percentage of the mortgage too.
Here is the breakdown of what qualified first time home buyers receive for purchase of:
- Newly constructed home, participants receive 5% or 10%
- Resale or existing home, participants receive 5%
- New or resale mobile/manufactured home, participants 5%
Requirements for the First Time Home Buyer Incentive
- Annual household income for first time home buyers shouldn’t be more than $120,000
- First time home buyer can’t have owned a home before
- Purchased home must be used for primary residence
- The participant must provide the 5% minimum down payment
- The mortgage loan cannot exceed 4 times the participant’s annual income
- The mortgage loan cannot exceed $480,000
Who benefits from the First Time Home Buyer Incentive?
This program better suits those living in areas of Canada outside of the major urban markets.
As the mortgage loan cannot exceed $480,000, the purchase price of the home would be in that range. The purchase price is restricted and cannot be too high. Thus, the incentive does not benefit those in major urban markets such as Vancouver or Toronto.
Do I have to pay back the mortgage loan?
Yes. The mortgage percentage put in by the Government of Canada is a loan. This percentage needs to be paid back to the Government of Canada by the time the home buyer sells the property. They can also pay back the loan earlier before selling the property, with no repercussions.
How does paying back the loan work?
When the home buyer decides to pay the loan back or sell their home in the future, they will pay back the same percentage they borrowed. This calculated percentage is from the appraised value or sale price at that current time.
To put things simply, the amount that the home buyer pays back may not be the same amount they initially borrowed. They will pay back the same percentage they received towards the down payment. However, when they pay it back, the calculated amount is based on the current price of the home.
Let’s look at an example together!
Let’s say you buy a brand new home at $300,000 in 2020.
The home buyer uses the First Time Home Buyer Incentive and receives 10% from the Government of Canada in order to purchase the home. This means they receive a loan of $30,000 towards the initial down payment.
In 2030 (10 years later), the house gets appraised at a value of $400,000. The home buyer decides to pay back the loan at this time.
The home buyer owes 10% of the home equity. Meaning, they now owe 10% of the current price of the home which is $400,000. Therefore, they owe $40,000 ($400,000 x 10% = $40,000) to the Government of Canada. This is $10,000 more than the amount they borrowed.
What is the benefit of the First Time Home Buyer Incentive for the Government of Canada?
As this is a shared-equity loan, the Government of Canada has a stake in the home equity. What this means for them is that they gain or lose on the investment with the home buyer. If there is any appreciation (value goes up) on the home price or home value, the government gains that added value when the home buyer sells the home and pays back the loan at a higher amount they borrowed.
However, the government could also lose out on the investment in a decreasing market. So it works both ways.
What is the benefit of the First Time Home Buyer Incentive for the home buyer?
Qualified first time home buyers benefit from this incentive program because they receive a loan towards their initial down payment. Instead of putting down a 5% down payment, they now put down as high as 15% from the added 10% loan received. The benefit here is that they will pay less in future mortgage payments, which makes a difference in the long run.
Limitations of the First Time Home Buyer Incentive
There are limitations to who qualifies as a first time home buyer. If a first time home buyer makes over $120,000, they would not qualify for this program, even though they are buying a home for the first time. They are not part of the population this program seeks to benefit.
Secondly, the borrowing amount is limited. The mortgage loan cannot exceed $480,000. Therefore, the home buyer cannot go out and purchase a home for say, $800,000. This limits certain home buyers in real estate markets with higher prices, including Vancouver and Toronto.
What is the minimum down payment to qualify?
The 5% minimum down payment rate still applies. There is no such thing as a zero down mortgage. The incentive program provides a loan to increase the percentage of the initial down payment and thereby decrease future mortgage payments. However, the first 5% must come from the home buyer.
Is mortgage insurance still necessary?
Yes. The home buyer is still putting a down payment under 20% of the purchase price. Therefore, mortgage insurance is required as usual. There is no way to bypass this, especially as the First Time Home Buyer Incentive program is in partnership with CMHC.
Is the First Time Home Buyer Incentive an ongoing program?
The government has set a total of $1.25 billion in funding for this program. What this means for home buyers is that the program is essentially on a first-come first-serve basis. Depending on how many people utilize this program, the funds may only be available for a limited amount of time.
Is the First Time Home Buyer Incentive only through CMHC?
Yes. This incentive program is in partnership with CMHC, a mortgage insurance provider, and the Government of Canada. CMHC, Canadian Mortgage Housing Corporation, is a crown corporation. The government owns the company but they function on their own.
The other two insurers in Canada are Genworth Canada and Canada Guaranty, which functions as private insurers.
Should I consider the First Time Home Buyer Incentive?
The First Time Home Buyer Incentive program could be very beneficial for certain individuals. It is meant to be used by home buyers in areas where real estate market prices are reasonable. This program is also meant for home buyers with under $120,000 of income total.
This program helps a certain population in Canada, but always take caution when taking the loan. At the end of the day, the borrowed money needs to be paid back. If first time home buyers are struggling to come up with the initial down payment, they must think forward of how they will pay back the loan. They must also account for all the extra expenses that come with buying a home and paying off a mortgage in the long run.
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