Info for first-time buyers

Last week, I sat in on a webinar hosted by CMHC that covered more information about the First-Time Home Buyer Incentive Program.

The intent of the plan is to help makes mortgages more affordable for qualified first-time home buyers.

The federal government will help with your down payment in exchange for an equity share in your home. You need to have the minimum down payment of five per cent from traditional sources, which can include a gift from immediate family or savings.

The program will provide five per cent toward your down payment, or if you are buying a newly constructed home the program will provide either five or ten per cent.

How does this help you as a first-time buyer?

The additional down payment helps reduce your mortgage insurance premium, which can result in significant savings over the life of your mortgage.

The additional down payment and subsequent lower insurance premium means your monthly mortgage payments will be slightly lower

Who qualifies to use the First-Time Home Buyer Incentive program?

  • At least one purchaser must be a first-time home buyer
  • Must not have owned a home during the last four years
  • People who have gone through a marital breakdown or separation (even if they have owned a home within the last four years)
  • Household income cannot exceed $120,000 per year
  • Canadian citizens, permanent residents, or non-permanent residents who are legally authorized to work in Canada
  • The maximum mortgage amount can be up to four times the amount of your annual income. If your income is $100,000, the maximum mortgage amount will be $400,000 so your purchase price will be $400,000 plus your down payment.

If you have $20,000 saved and the program kicks in $20,000, your purchase price would be $440,000.

As the maximum allowable income under the program is capped at $120,000 this means the maximum mortgage amount will be $480,000 (plus the related CMHC premium) plus your down payment.

This puts the maximum purchase price under the program at $530,000, or $542,500 slightly higher for a brand new home).

Something to consider is that if you choose not to use the program, with the same income of $120,000 your maximum purchase price would be higher. Allowing for property taxes and heat, your purchase price would be approximately $575,000.

The federal government’s new plan is slated to roll out today. Mortgages approved under the program can close Nov. 1 or later.

The program’s information page contains a qualifier stating that these dates may change due to unforeseen circumstances.

The government’s contribution is non-interest bearing and must be repaid when you sell your home or after 25 years.

Instead of charging interest, the government has structured this as an equity share in your home.

What this means is that when you sell your home, you will repay the government the same percentage of the sale value of your home (or current value of the home if you still own it at the 25-year mark) as their original contribution.

As an example, you buy a home priced at $300,000. The government kicks in $15,000. Ten years later, you sell your home for $400,000. Your repayment to the program is $20,000 (five per cent of $400,000).

If the market crashed and your home sold for $200,000, your repayment would be five per cent of $200,000 so in this case $10,000.

Using the example of the $300,000 purchase price, having the additional $15,000 toward your down payment would reduce your monthly payment by about $75. You would pay about $4,500 less over the first five-year term.

If you sold at the end of five years for $400,000 your repayment of the equity share would be $20,000 – five per cent of the sale price of your home. Doing the math, you paid $4,500 less in payments but it cost you $5,000.

Say you sell your home at the 10-year mark. For years six to 10 of your mortgage, assuming a similar interest rate and no extra principal payments, with the reducing balance your payments are about $60 less per month less. So you pay $8,100 less over the ten years ($4,500 + $3,600).

By taking advantage of the program, your mortgage insurance premium would be $3,030 less than if you decided to only use your own funds for down payment.

At the end of the 10 years you sell your home for $500,000. Your repayment to the program would be $25,000. The government’s initial contribution was $15,000.

This equity share has now cost you $10,000  less the $3,030 reduced insurance premium which was added to the mortgage upfront. Factor in that your payments were $8,100 lower, so you have benefited by $1,130 having used the additional down payment.

There are a few additional costs that you will incur by using the program.

For example, there will be an additional charge at the lawyer’s for registering the equity share against the title of your home. You will need to get a quote from your specific legal representative, but with the BC program two years ago it cost my clients between $150 and $200 extra.

When it comes time to repay the equity share, an appraisal will be required to determine the current value of your home, so there will be the cost of the appraisal to cover.

The information released so far indicates that the government’s contribution to your down payment will be registered as a second mortgage against your home.

Repayment of the government’s share is triggered by either the sale of your home or when you hit the twenty-five year mark. The program guidelines say that the contribution does not have to be paid back if you refinance your home.

However, in the case of a refinance the government’s equity share would stay as a priority ahead of any new funds that might be issued by your lender. At this time, most lenders would require that the charge be removed so their mortgage has first priority.

As with any new program or policy change there may be a work-around developed, but I feel it is important to understand that you will likely have to repay the equity share if you are looking to refinance your home.

Ideally, you would pay off the government’s contribution as soon as possible, as the repayment amount is based on the value of the home at the time you pay it off, but in the event of a refinance this reduces the amount available to you (trade off being you have repaid the equity share sooner rather than later).

It may not sound like much, but by reducing your monthly mortgage payment by even $75 frees up those funds for daily essentials, or maybe even a savings account for future repairs to your home.

In our market, there are still many housing options available within the mortgage cap of the program. The key take-away is that if you are considering taking advantage of the plan, make sure you have a solid understanding of both the pros and cons.

For more information about the specifics of the program, check out the link to the government site on the Resources section of our webpage.

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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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